Environmental regulation incidences towards international oligopolies: pollution taxes vs emission permits

The purpose of this paper is to analyze whether the choice between two instruments of environmental policy (pollution taxes vs emission permits) affects the market shares in the presence of imperfectly competitive product markets. We consider two countries, referred to as the Domestic country and the Foreign country, agreeing on an equally stringent exogenous ceiling on pollution. These countries are also suppliers on the international markets of two commodities produced by two separate sectors competing à− la− Cournot. The environmental policy taken by each government is different. The Domestic country implements a tradable emission permits market, while the Foreign country imposes a specific pollution tax across sectors. Thus, the Higher− Abatement− Cost (the Lower) sector in the Domestic country increases (decreases) its market shares compared to its counterpart in the Foreign country.