International environmental agreements, uncertainty and learning: the case of stock dependent unit damage costs

In Ulph (2002) I analysed how the possibility of future resolution of uncertainty about damage costs affected the incentives and timing for countries to join a self-enforcing international environmental agreement (IEA). I analysed two membership rules – fixed (countries commit whether to join an IEA for all periods) and variable (countries decide each period whether to join). While total damage costs depended on the stock of pollution, average damage costs did not. One consequence was that, in the variable membership model the number of countries who joined in the current period could not be affected by future learning. In this paper I allow unit damage costs to depend on the stock of pollution. I show that while this complicates the analysis, all the results of the previous paper are essentially unaffected. In particular, with variable membership future learning has almost no affect on current membership

International environmental agreements, uncertainty and learning: the case of stock dependent unit damage costs

In Ulph (2002) I analysed how the possibility of future resolution of uncertainty about damage costs affected the incentives and timing for countries to join a self-enforcing international environmental agreement (IEA). I analysed two membership rules – fixed (countries commit whether to join an IEA for all periods) and variable (countries decide each period whether to join). While total damage costs depended on the stock of pollution, average damage costs did not. One consequence was that, in the variable membership model the number of countries who joined in the current period could not be affected by future learning. In this paper I allow unit damage costs to depend on the stock of pollution. I show that while this complicates the analysis, all the results of the previous paper are essentially unaffected. In particular, with variable membership future learning has almost no affect on current membership.

The Effects of Environmental Policy on the Performance of Environmental RIVs

Much of the potential impact of environmental policy is though to come from the incentives it gives firms to develop and introduce new environmental products and processes. Almost all the literature on this issue has focused on the impact of environmental policy on the amount environmental R&D that firms undertake, assuming that such R&D is undertaken independently or non-cooperatively. It is now widely recognized that there are considerable potential benefits from having firms undertake R&D cooperatively through research joint ventures (RJVs). In this paper we analyze the impact of environmental policy on the performance of environmental RJVs and underage an explicit welfare comparison of this performance against the counterfactual of a non-cooperative equilibrium. The framework we adopt is that developed by Katsoulacos and Ulph (1998) which identifies three stages in the innovative process -- research design, R&D; information sharing -- and endogenises each of these inter-related decisions in both the cooperative and non-cooperative equilibria. The case we examine is that in which governments cannot commit to environmental policy, so all these decisions have to taken anticipating the environmental policy that will finally be imposed. We show that RJVs are welfare enhancing when the levels of environmental damage caused by pollution are low. In this case RJVs fully share information and internalize the associated externality. However when the level of damage is high, it turns out that firms anticipate tougher environmental policy when they share information then when they do not, and so do not share information. This distorts the RJV's R&D decisions in ways that make the non-cooperative equilibrium welfare enhancing.

An Infinite-Horizon Model of Dynamic Membership of International Environmental Agreements

Much of the literature on international environmental agreements uses static models, although most important transboundary pollution problems involve stock pollutants. The few papers that study IEAs using models of stock pollutants do not allow for the possibility that membership of the IEA may change endogenously over time. In this paper we analyse a simple infinite-horizon version of the Barrett (1994) model, in which unit damage costs increase with the stock of pollution, and countries decide each period whether to join an IEA. We show that there exists a steady-state stock of pollution with corresponding steady-state IEA membership, and that if the initial stock of pollution is below (above) steady-state then membership of the IEA declines (rises) as the stock of pollution tends to steady-state. As we increase the parameter linking damage costs to the pollution stock, initial and steady-state membership decline; in the limit, membership is small and constant over time.Self-enforcing international environmental agreements, Internal and external stability, Stock pollutant

Optimal Climate Change Policies When Governments Cannot Commit

This paper examines the optimal design of climate change policies in the context where governments want to encourage the private sector to undertake significant immediate investment in developing cleaner technologies, but the carbon taxes and other environmental policies that could in principle stimulate such investment will be imposed over a very long future. The conventional claim by environmental economists is that environmental policies alone are sufficient to induce firms to undertake optimal investment. However this argument requires governments to be able to commit to these future taxes, and it is far from clear that governments have this degree of commitment. We assume instead that governments cannot commit, and so both they and the private sector have to contemplate the possibility of there being governments in power in the future that give different (relative) weights to the environment. We show that this lack of commitment has a significant asymmetric effect. Compared to the situation where governments can commit it increases the incentive of the current government to have the investment undertaken, but reduces the incentive of the private sector to invest. Consequently governments may need to use additional policy instruments – such as R&D subsidies – to stimulate the required investment

Environmental policy when consumers value conformity

We present a model of consumer behaviour when consumers value conformity and examine the implications for environmental policy. The model shares a feature set out in Dasgupta, Southerton, Ulph and Ulph (2016) of having a structure of preferences for conformity which induces a mass of consumers to adhere exactly to a norm level of consumption (clumping). However we extend our previous analysis by analysing the conditions for the existence and potential uniqueness of consumption norms. In doing so we introduce threshold effects whereby individuals adhere to a norm only if sufficiently many others do so. Taken together these have striking implications for environmental policy in the case where the norm good generates pollution emissions. Clumping means many individuals will not change behaviour unless the norm changes while threshold effects plus clumping means that it may be hard to change a norm. We show that the use of Pigovian taxes to control behaviour may be either ineffective or welfare reducing, and that the optimal Pigovian tax will work only if it is above some threshold level. There are parameter values for which quantity-based injunctive policies raise welfare relative to no intervention while optimal Pigovian taxes would lower welfare.PostprintPeer reviewe

Advertising in a differentiated duopoly and its policy implications for an open economy

In this paper, we develop a model of advertising in a differentiated duopoly in which firms first decide how much to invest in cooperative or predatory advertising and then engage in product market competition (Cournot or Bertrand). We then use this model, with endogenously determined type of advertising, to explore the policy implications in the context of a Brander-Spencer third-country model of strategic trade. We first analyse optimal policies when governments use both trade and industrial policies and show that these policies are substitutes. We then study optimal policy when governments can use only one policy instrument and show that industrial policy is robust, i.e., governments will always use an advertising subsidy irrespective of the type of advertising and form of market competition. More interestingly we show that for a range of parameter values we also get robust trade policy in which governments always use a trade subsidy irrespective of the type of advertising or form of market competition. Keywords; cooperative advertising, predatory advertising, first best policy combination, robust industrial policy, robust trade policy

Optimal Climate Change Policies When Governments Cannot Commit

This paper examines the optimal design of climate change policies in the context where governments want to encourage the private sector to undertake significant immediate investment in developing cleaner technologies, but the carbon taxes and other environmental policies that could in principle stimulate such investment will be imposed over a very long future. The conventional claim by environmental economists is that environmental policies alone are sufficient to induce firms to undertake optimal investment. However this argument requires governments to be able to commit to these future taxes, and it is far from clear that governments have this degree of commitment. We assume instead that governments cannot commit, and so both they and the private sector have to contemplate the possibility of there being governments in power in the future that give different (relative) weights to the environment. We show that this lack of commitment has a significant asymmetric effect. Compared to the situation where governments can commit it increases the incentive of the current government to have the investment undertaken, but reduces the incentive of the private sector to invest. Consequently governments may need to use additional policy instruments – such as R&D subsidies – to stimulate the required investment

Environmental regulation, multinational companies and international competitiveness

Concerns have been expressed that in a global market place with mobile capital, national governments will have incentives to set weak environmental policies (“environmental dumpingâ€) to protect the international competitiveness of their domestic firms, that these incentives are particularly strong in industries where plants may be relatively footloose, so that governments are concerned to prevent “capital flightâ€, and that footloose plants are particularly associated with multinational firms. It is then often suggested that appropriate policy responses would be to seek to harmonise environmental regulations or impose minimum standards for environmental regulations. In this paper we set out these concerns in terms of a number of more precisely made claims and then review recent developments in economic analysis (including some of our own work) and empirical evidence to show that the claims cannot be generally sustained and that the suggested policies may be harmful. However, devising more appropriate policies is by no means straightforward. Keywords; plant location, environmental policy, eco-dumping, competition JEL Classification: F1, H4, L5, Q2