Reforms of environmental policies in the presence of cross-border pollution and public-private clean-up

Abstract

We construct a two-country model where pollution from production is transmitted across borders. Pollution abatement is undertaken by both private producers and the public sector. We characterize Nash optimal levels of the policy instruments in the two countries: emission taxes and funds allocated for public abatement activities. We examine the implications of a number of multilateral policy reforms. One of our findings is that the magnitude of the beneficial effect of a reform depends on the scope of the reform

if it is restricted to a subset of policy instruments, then the efficacy of environmental policy reform can be greatly undermined. © The editors of the Scandinavian Journal of Economics 2005.