The efficiency of decentralized environmental policies under global pollution and tradable emission permits

Abstract

Abstract We build a two asymmetric regions model with cross‐border pollution related to production. Each region issues emission permits and revenues from their sales finance public pollution abatement. The decentralized level of emission permits is efficient when permits are interregionally tradable and cross‐border pollution is perfect. This result is robust in a variety of cases—for example, when (i) capital is immobile or internationally mobile or only mobile between the two regions, and (ii) revenue from permits sales is transferred to a federal authority.