International Competitiveness and Strategic Distribution of Emission Permits

This paper combines issues related to strategic environmental policy in the case of the design of emissions permits, which affects the rules of international trade. Our model, based on a strategic environmental policy’s framework, analyzes a class of two stages Cournot game involving two governments (Domestic and Foreign) and their respective industry, which compete in a third country market. It shows that the Domestic government may have a strong incentive to distort its distribution of emission permits from the first-best rule so as to achieve trade-related policies objectives enabling their domestic producers to improve its market share in non cooperative rivalries with the foreign firms. We find that the domestic government issue a higher strategic distribution of emission permits than the optimal level. Therefore, the environmental damage is no more internalized such that the effects of this strategic policy setting on economic welfare is ambiguous. JEL Classification : F13, F18, Q28 ∗Author’s address: Laboratoire d’Economie, Ecole Centrale Paris, Grande Voie des Vignes, 92295 Châtenay-Malabry cedex France, Phone.: +33.1.41.13.16.36, E-mail: [email protected]. †Acknowledgements to the "Agence de l’Environnement et de Maîtrise de l’Energie" ADEME for financial support. The author is grateful to all participants in the VIII Conference in "Theories and Methods of Macroeconomics" for comments on an earlier version presented. This paper also benefited from discussion with the participants of the EAERE Summer School "Political Economy of the Environment".