Environmental Agreements in a Two-Level Dynamic Framework

Abstract

This paper addresses the issue of conflicts between countries who share a renewable natural resource using a two-level framework. Contrary to the usual modeling of countries as representative agents who sign an international treaty to protect the resource that they share, this research considers the existence of some interaction between different sort of consumers and firms within each country. It discusses the influence of both domestic characteristics (consumers´ preferences and firms´costs) and the presence of some national environmental policy on the resulting regional agreement. The international level is modeled as a dynamic game in which each government decides its domestic regulation. Agreements are viewed as the result of some sort of bargaining among countries. An important insight of this paper is the incorporation of a numerical simulation (for a linearquadratic example) to depict the dynamics of the model. In particular, its main result is an estimation of the path of emissions with the optimum treaty and without any agreement (the Markov Perfect equilibrium of the game).