The efficiency of voluntary pollution abatement when countries can commit

We characterize a mechanism for reducing pollution emissions in which countries, acting non-cooperatively, commit to matching each others' abatement levels and may subsequently engage in emissions quota trading. The mechanism leads to an efficient level of emissions, and if the matching abatements process includes a quota trading stage, the marginal benefits of emissions are also equalized across countries. Given equilibrium matching rates, the initial allocation of emission quotas (before trading) reflects each country's marginal valuation for lower pollution relative to its marginal benefit from emissions. These results hold for any number of countries, in an environment where countries have different abatement technologies and different benefits from emissions, and even if the emissions of countries are imperfect substitutes in each country's damage function. In a two-period setting, the mechanism achieves both intra- and inter-temporal efficiency.

Research Highlights►If one country can commit to matching the other's abatements, efficient levels will be chosen. ►If abatement permits can be traded, abatements will be allocated efficiently across countries. ►The analysis applies if countries' emissions are imperfect substitutes. ►The analysis also extends to an inter-temporal setting, where pollution is persistent. ►The equilibrium costs of abatements in each country, will reflect Lindahl prices.