Anticipated International Environmental Agreements

Consider a two-period transboundary stock pollution game in which countries anticipate an international environmental agreement (IEA) to be in effect in the future (i.e., in period 2). What will be the impact of the future IEA on current emissions (i.e., in period 1)? We show that the answer to this question is ambiguous. We examine a fi rst type of IEA where countries anticipate that the level of emissions in period 2 will be set at an agreed upon target. Assuming that the countries can commit to this policy, we show that when this target is set close to the business-as-usual (BAU) level of emissions, the equilibrium level of emissions in period 1 falls below its BAU level. However, the emission level in period 1 is a decreasing function of the target that will prevail in period 2, hence, the impact of this policy on period 1 emissions may be ambiguous, and in general depend on the targeted emission level. We also examine other types of IEAs where countries cannot commit to an emission level but rather commit to an emission policy rule that depends on the level of pollution stock.