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,
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.

Publication Date: 25 Mar 2020
© 2020 K. R. Kaushal
Environmental economics,  Economic theory,  Climate change
JEL Codes: C70D61F18H23Q54
Emission priceoutput-based allocationconsumption taxcarbon leakageemission trading systemunilateral policy


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


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.