Working Paper: CEPR ID: DP15044
Authors: Bard Harstad; Francesco Lancia; Alessia Russo
Abstract: We characterize the optimal policy and policy instruments for self-enforcing treaties when countries invest in green technology before they pollute. If the discount factor is too small to support the first best, then both emissions and investments will be larger than in the first best, when technology is expensive. When technology is inexpensive, countries must instead limit or tax green investment in order to make future punishment credible. We also uncover a novel advantage of price regulation over quantity regulation, namely that when regulation is sufficiently flexible to permit firms to react to non-compliance in another country, the temptation to defect is reduced. The model is tractable and allows for multiple extensions.
Keywords: climate change; compliance; environmental agreements; green technology; policy instruments; repeated games; self-enforcing treaties
JEL Codes: D86; F53; H87; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower discount factor (H43) | higher emissions (F64) |
| lower discount factor (H43) | higher investments (G31) |
| cost structure of technology (D24) | regulatory outcomes (K20) |
| type of regulation (L51) | compliance behavior (K40) |
| overinvestment in green technology (Q55) | mitigate temptation to defect (C72) |