Optimal strategic regulations in international emissions trading under imperfect competition

This paper analyzes governments’ strategic regulations in an imperfectly competitive market of international emissions trading (IET). Whether and how governments intervene in IET is explored. If regulations are decided, it is optimal for price-influencing countries to subsidize but for price-taking countries to tax permit trading. Conducting simulations of the Annex-1 emissions trading, we discover that no-intervention of all countries cannot be supported by any equilibrium. In contrast, all or some countries would regulate at equilibrium. In the latter case, price-influencing countries would not regulate but price-taking countries would. This justifies the necessity of considering no-intervention as a policy choice, and shows that a country’s decisions about strategically regulating IET may be affected by other countries’ intervention resolutions. Copyright Springer 2013