The burden sharing of pollution abatement costs raises the issue of how the costs are supported by entities (regions or industries) of a country that decides to reduce pollution, e.g., in the Kyoto Protocol context. This paper explores this issue in the framework of a dynamic endogenous growth 2 sectors - 2 regions - 2 inputs Heckscher-Ohlin model of a small open economy with an international tradable permits market. Given an "emission-based grand-fathering" sharing rule, capital accumulation is more negatively affected by the environmental policy in the energy intensive sector if energy and capital are complementary. But the picture could be different in terms of total sectoral revenue, depending on the evolution of prices. Finally, we show that the impact of environmental policy at the regional level depends crucially on the evolution of regional specialization patterns.
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Find related papers by JEL classification: D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
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