Strategic Behavior and the Environment > Vol 8 > Issue 2

Optimal Climate Policy in the Presence of Another Country's Climate Policy

Kevin R. Kaushal, Statistics Norway and Norwegian University of Life Sciences, Norway, kevin.kaushal@ssb.no
 
Suggested Citation
Kevin R. Kaushal (2020), "Optimal Climate Policy in the Presence of Another Country's Climate Policy", Strategic Behavior and the Environment: Vol. 8: No. 2, pp 131-167. http://dx.doi.org/10.1561/102.00000093

Publication Date: 25 Mar 2020
© 2020 K. R. Kaushal
 
Subjects
Environmental Economics,  Environmental Economics:Market-based Policy Instruments,  Economic Theory:Game Theory,  Climate Change
 
Keywords
JEL Codes: C70D61F18H23Q54
Emission priceoutput-based allocationconsumption taxcarbon leakageemission trading systemunilateral policy
 

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In this article:
Introduction
Stylized Partial Model Analysis
The Numerical CGE Model
Concluding Remarks
Appendix A: Summary of the Numerical CGE Model
Appendix B: Tables
References

Abstract

The allowances in an emission trading system (ETS) are commonly allocated for free to the emission-intensive and trade-exposed sector, e.g., in the form of output-based allocation (OBA). Recently an approach combining OBA with a consumption tax has been proposed to mitigate carbon leakage. This paper evaluates the potential outcome in a game of climate policies, by examining the Nash equilibrium outcome of a non-cooperative policy instrument game between regions that regulate their emissions separately. We construct a computable general equilibrium model and investigate the case when regions can choose to supplement their ETS with OBA and/or with a consumption tax, in the presence of another regulating region. In the context of the EU and China, we show how regional interests combined with a national climate target, may lead to different climate policy combinations.

DOI:10.1561/102.00000093