Self-enforcing environmental agreements and capital mobility

In a multi-country model with mobile capital and global pollution this paper analyzes self-enforcing environmental agreements (IEAs) when the coalition formed by the signatory countries plays Nash. In accordance with a previous environmental literature we show that there exists a unique self-enforcing IEA consisting of two or three signatory countries if emission tax rates are strategic substitutes. However, emission tax rates are strategic complements if the pollution is not too detrimental. In that case we find very small self-enforcing IEAs, as before, but now the socially optimal agreement among all countries may be self-enforcing as well. Special emphasis is placed on the investigation and interpretation of the conditions which render stable the grand coalition.