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Tradable Permits vs Ecological Dumping

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  • Panos Hatzipanayotou

    (Athens University of Economics and Business and CES-ifo)

  • Fabio Antoniou

    (Athens University of Economics and Business)

  • Phoebe Koundouri

    (Athens University of Economics and Busines)

Abstract

In this paper we examine an alternative policy scenario, where governments allow polluting firms to trade permits in a strategic environmental policy model. We demonstrate, among other things, that with no market power in the permits market, governments of the exporting firms do not have an incentive to under-regulate pollution in order to become more competitive. This strategic effect is reversed and leads to a welfare level closer to the cooperative one and strictly higher to that when permits are non-tradable. Allowing for market power in the permits market, the incentive to under-regulate pollution re-appears regardless of whether permits are tradable or not. With tradable permits, however, the incentive to under-regulate pollution is comparatively weaker relative to the case of non-tradable permits. This entails potential benefits for the exporting firms and countries since the prisoners’ dilemma is moderated.

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Bibliographic Info

Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2010.2.

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Date of creation: Jan 2010
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Handle: RePEc:fem:femwpa:2010.2

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Keywords: Strategic Environmental Policy; Tradable Permits; Race to the top;

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