Second Best Environmental Policies under Uncertainty
Fabio Antoniou, Panos Hatzipanayotou, Phoebe Koundouri
F12, F18, Q58
Strategic Environmental Policy, Pollution, Choice of Policy Instrument, Uncertainty
Climate Change and Sustainable Development
We construct a strategic trade model of an international duopoly, whereby production by exporting firms generates a local pollutant. Governments use environmental policies, i.e., an emissions standard or a tax, to control pollution and for rent shifting purposes. Contrary to their firm, however, governments are unable to perfectly foresee the actual level of demand, the cost of abatement and the damage caused from pollution. Under these modes of uncertainty we derive sufficient conditions under which the governments optimally choose an emissions tax over an emissions standard.