Resumen de Welfare Ranking of Environmental Policies in the Presence of Capital Mobility and Cross-Border Pollution

Nikos Tsakiris, Panos Hatzipanayotou, Michael S. Michael

• We construct a model of two regions with cross-border pollution, and with inter-regional (regional capital mobility [RCM]) or international (international capital mobility [ICM]) capital mobility. Each region uses emission taxes, or intra-regionally, or inter-regionally tradable emission permits to reduce pollution. We show that the non-cooperative settings of all three instruments are always inefficient relative to their cooperative settings. When regions are symmetric, then (i) with RCM the non-cooperative setting of intra-regionally tradable emissions permits is welfare superior to that of the other two instruments, (ii) with ICM the non-cooperative settings of intra-regionally tradable emission permits and of emission taxes are equivalent and superior to that of inter-regionally tradable emission permits, and (iii) with ICM the three instruments are equivalent only when cross-border pollution is perfect.