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Carbon Leakage: The Role of Sequential Policy Setting

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  • Sikdar, Shiva
  • Lapan, Harvey E.

Abstract

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.

Suggested Citation

  • Sikdar, Shiva & Lapan, Harvey E., 2010. "Carbon Leakage: The Role of Sequential Policy Setting," Staff General Research Papers Archive 31312, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genres:31312
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    File URL: http://www2.econ.iastate.edu/papers/p11312-2010-02-10.pdf
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    File URL: https://www-cambridge-org.proxy.lib.iastate.edu/core/journals/environment-and-development-economics/article/carbon-leakage-the-role-of-sequential-policy-setting/8297A4680C2C14E1BEA755410B10AC15
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    Cited by:

    1. Harvey E. Lapan & Shiva Sikdar, 2017. "Can Trade Be Good for the Environment?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 19(2), pages 267-288, April.

    More about this item

    Keywords

    Carbon leakage; Sequential-move game; Strategic environmental policy; Trans- boundary pollution.;

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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