Carbon Leakage: The Role of Sequential Policy Setting
�We analyze non-cooperative environmental policy when the only strategic interaction between countries is through bilateral transboundary pollution, i.e., countries are�closed or small open economies. When countries set pollution taxes simultaneously,�there is no carbon leakage. However, in the sequential-move game, the leader sets its�pollution tax lower than the marginal damage from own pollution and lower than that�in the simultaneous-move game, while the follower sets its tax higher than that in the�simultaneous-move game. The only motive behind the leader's underregulation of own�pollution is to reduce the incidence of transboundary pollution from the follower, i.e.,�to reduce carbon leakage. Aggregate pollution is higher in the sequential-move game�than in the simultaneous-move game if pollution is a pure global public bad.
|Date of creation:||10 Feb 2010|
|Date of revision:|
|Publication status:||Published in Environment and Development Economics, February 2012, vol. 17 no. 1, pp. 91-104|
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