Strategic environmental policy under free trade

What is it about?

We develop a reciprocal dumping model to control industrial pollution between identical trading partners. We compare non-cooperative emissions tax decisions to the globally efficient cooperative solution. We find that strategic behaviors may endogenously lead to asymmetric tax rates in equilibrium. The tax rate under cooperation can be larger or smaller compared to the non-cooperative case. A country’s payoff in the non-cooperative case can be higher than in the cooperative case.

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