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How does the design of international environmental agreements affect investment in environmentally friendly technologies ?

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Abstract

This paper studies the link between the design of international environmental agreements and the incentives for the private sector to invest in cleaner technologies. More specifically, it compares the performance, in the Paretoo sense, of two types of agreement : an agreement on a uniform standard with transfers and an agreement on differentiated standards without transfers. To achieve this goal, we use a multi-stage game where the private sector anticipates its irreversible investment given the expected level of abatement standards, resulting from future bilateral negotiations. Our findings indicate that whenever countries are able to partially commit, the agreement on a uniform standard may be preferable, as it creates greater incentives for firms to invest in costly abatement technology. This result relies on the low level of the set-up cost of this technology. If this level is sufficiently high, the announcement and implementation of the agreement on a uniform standard with transfers is not optimal, because it takes away the incentive of all firms to invest in a new abatement technology.

Suggested Citation

  • Basak Bayramoglu, 2007. "How does the design of international environmental agreements affect investment in environmentally friendly technologies ?," Documents de travail du Centre d'Economie de la Sorbonne v07030, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  • Handle: RePEc:mse:cesdoc:v07030
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    File URL: ftp://mse.univ-paris1.fr/pub/mse/CES2007/V07030.pdf
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    Keywords

    Agreements; standards; transfers; technology adoption; irreversible investment; bargaining; transboundary pollution.;

    JEL classification:

    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games

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