Abatement Level in Environmental Agreements when Firms are Heterogeneous in Abatement Costs.

Abstract

There is an important number of regional and international environmental agreements where countries have agreed upon in order tackle environmental degradation (e.g., reduce greenhouse gases). In addition, member countries exhibit varying pollution abatement technologies and degrees of pollution intensities as well as different cost structures. As new agreements take place (e.g., COP21 Paris) and existing ones evolve as climate and economic conditions change, the analysis of policy reform of environmental policy becomes timely and relevant. With these in mind, this paper builds a two-country model where rms compete in a Cournot fashion, face an emission tax and exhibit heterogeneous abatement costs. In this context, the analysis of policy reform is presented, particularly its impact on global emissions. It is shown that asymmetries in abatement and production costs play a crucial role on the extent to which global emissions fall via unilateral and multilateral policy reform.