Optimal environmental policy differentials in open economies under emissions constraints

C.A.A.M. Withagen, R.J.G.M. Florax, A. Mulatu

Research output: Contribution to journalArticleAcademicpeer-review

4 Citations (Scopus)

Abstract

Is there a case for preferential treatment of the exposed sector in an economy when compliance to an aggregate emissions constraint induced by an international environmental agreement is mandatory? This question is being debated in many countries in the context of the implementation of the Kyoto Protocol. We address the issue in a general equilibrium framework and theoretically cover several market structures, including perfect competition, the large country case and oligopoly. We identify the conditions under which preferential treatment of the exposed sector is not warranted from the point of view of maximizing social welfare. In addition, we demonstrate that in the case of oligopoly, instituting a more stringent environmental policy on the exposed sector might be profit-enhancing for this sector. This finding lends theoretical support to a specific interpretation of the Porter hypothesis.
Original languageEnglish
Pages (from-to)129-149
JournalJournal of Economics
Volume91
Issue number2
DOIs
Publication statusPublished - 2007

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