Competing firms, competing regulators: The strategic cost of fragmented climate policy

Climate policy in global network industries is implemented across fragmented jurisdictions, yet firms respond through integrated operational networks. We develop a two-stage game-theoretic framework to analyze how firm-level responses interact with alternative governance structures. Regulators first choose emissions charges. Firms subsequently compete through pricing, service capacity and capital deployment decisions. The analytical results demonstrate that uniform global regulation maximizes welfare in symmetric markets. However, in sufficiently asymmetric markets, a uniform global charge is dominated by decentralized regimes. Multiple regulatory instruments better accommodate region-specific market externalities. We apply this framework to a calibrated case study of North American, Western European and transatlantic aviation markets. The numerical results establish that a globally coordinated regulator setting region-specific charges achieves the highest aggregate welfare. These aggregate gains nonetheless mask substantial distributional disparities across jurisdictions. Effective climate governance in network industries therefore requires more than determining an efficient emissions charge. Policy instruments ought to accommodate regional heterogeneity and transfer mechanisms will be necessary to ensure efficient, politically stable cooperation.