Multilateral and unilateral policy reform of emission taxes and abatement subsidies in a two-country model with oligopolistic interdependence.

Abstract

This paper considers a two-country model with oligopolistic interdependence where firms make their output and emission decisions simultaneously, and face an emission tax and abatement subsidy. The impact of multilateral and unilateral policy reform on global emissions and welfare is examined, and the impact of the degree of product differentiation on optimal policy is explored. The analysis indicates that multilateral/unilateral policy reform reduces emissions and raises welfare under alternative assumptions on the cost function and parameter values. Additionally, it is shown that optimal policy is sensitive to the degree of product differentiation.