Transboundary Pollution Control and Environmental Absorption Efficiency Management

In this paper, we suggest a two-player differential game model of transboundary pollution that accounts for time-dependent environmental absorption efficiency, which allows the biosphere to switch from a carbon sink to a source. We investigate the impact of negative externalities resulting from a transboundary pollution noncooperative game wherein countries are dynamically involved. Based on a linear-quadratic specification for the instantaneous revenue function, we assess transient path and steady-state differences between cooperative solution, open-loop, and Markov perfect Nash equilibria (MPNE). Regarding the methodological contribution of the paper, we suggest a particular structure of the conjectured value function to solve MPNE problems with multiplicative interaction between state variables in one state equation, so that third-order terms that arise in the Hamilton-Jacobi-Bellman equation are made negligible. Using a collocation procedure, we confirm the validity of the particular structure of the conjectured value function. The results suggest unexpected contrasts in terms of pollution control and environmental absorption efficiency management: (1) in the long run, an open-loop Nash equilibrium (OLNE) allows equivalent emissions to the social optimum but requires greater restoration efforts; (2) while an MPNE is likely to end up with lower emissions and greater restoration efforts than an OLNE, it has a much greater chance of falling in the emergency area; (3) the absence of cooperation and or precommitment becomes more costly as the initial absorption efficiency decreases; (4) more heavily discounted MPNE strategies are less robust than OLNE to prevent irreversible switching of the biosphere from a carbon sink to a source.