Emission Permits and Public Pollution Abatement:: Can Decentralized Environmental Policies be Efficient?

We build a two regions general equilibrium model with cross-border pollution and either international or only inter-regional capital mobility. To control pollution each region uses public pollution abatement and issues either intra-regionally or inter-regionally tradable emission permits. We analyze the non-cooperative (decentralized) and cooperative (centralized) equilibrium level of emission permits and we examine when and how cross-border pollution and the type of capital mobility affect these equilibrium policies. We provide the welfare ranking of the policies in the various cases and we investigate under what conditions the decentralized and centralized equilibrium policies are equally efficient.