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Tradable Permits vs Ecological Dumping

  • Phoebe Koundouri

    (Dept. of International and European Economic Studies, Athens University of Economics and Business)

  • Fabio Antoniou

    ()

    (Athens University of Economics and Business)

  • Panos Hatzipanayotou

    ()

    (Athens University of Economics and Business)

In this paper we examine an alternative policy scenario, where governments allow polluting Ã??rms 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 Ã??rms and countries since the prisonersÃ??dilemma is moderated.

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Paper provided by Athens University of Economics and Business in its series DEOS Working Papers with number 1002.

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Length: 28 pages
Date of creation: 01 Feb 2009
Date of revision:
Handle: RePEc:aue:wpaper:1002
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