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Nationally and Internationally Optimal Climate Policies: External Balances versus Environmental Preferences


  • Birgit Bednar-Friedl
  • Karl Farmer


This article compares nationally optimal to internationally optimal (Pareto efficient) emission permit levels in a two-country overlapping generations model with national emission permit systems and the environment as a global public good. When each government maximizes its steady state economic and environmental welfare and one country is a net foreign creditor and the other one a net foreign debtor, it is nationally optimal for the creditor country with sufficiently high environmental preferences to chose a stricter permit level than the debtor country. However, the resulting Nash equilibrium permit levels are not Pareto efficient. Depending on the direction and strength of the countries' differences in external balances and environmental preferences, Pareto efficiency mandates that their permit levels are either adjusted in opposite directions or reduced in both. (JEL codes: F59; Q54; D62) Copyright The Author 2010. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please email:, Oxford University Press.

Suggested Citation

  • Birgit Bednar-Friedl & Karl Farmer, 2011. "Nationally and Internationally Optimal Climate Policies: External Balances versus Environmental Preferences," CESifo Economic Studies, CESifo, vol. 57(3), pages 432-457, September.
  • Handle: RePEc:oup:cesifo:v:57:y:2011:i:3:p:432-457

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    Cited by:

    1. Birgit Bednar-Friedl, 2012. "Climate policy targets in emerging and industrialized economies: the influence of technological differences, environmental preferences and propensity to save," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 39(2), pages 191-215, May.

    More about this item

    JEL classification:

    • F59 - International Economics - - International Relations, National Security, and International Political Economy - - - Other
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • D62 - Microeconomics - - Welfare Economics - - - Externalities


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