International Environmental Problems

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International Environmental Problems

• ??? ??
• Lecture 08.
• 2005? 11? 2?

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1. Transboundary Pollution
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(1) Introduction
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(2) A Simple Model
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Nash Equilibrium
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The Prisoners Dilemma
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(3) International Cooperation

• It is clear from the second figure that there are
  points along the efficiency frontier at which
  both countries could be better-off than at the
  Nash equilibrium.
• ? This implies that there are potential gains to
  cooperation.
• The key problem with achieving cooperation is
  that each country has a strict incentive to
  defect from any cooperative solution that is not
  a Nash equilibrium, and points along the
  efficiency frontier are not Nash equilibria.
• ? The two countries face a so-called prisoners
  dilemma.

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• There may nonetheless be ways of achieving
  cooperation. The game analyzed in the previous
  section was a one shot game it is played only
  once.
• Cooperation can sometimes be supported as an
  equilibrium to a repeated game (if the time
  horizon is infinite) through the threat of a
  return to the one shot game equilibrium in the
  event that either country defects from the
  cooperative agreement.

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• Cooperation may also be supportable through the
  threat of sanctions.
• The payoffs in the simple model in the previous
  section depended only on emissions.
• In reality, trade and others interactions between
  countries imply richer relationships between
  countries, and these may provide a means for
  implementing cooperation on global pollution
  problems.

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The Symmetric Case

• In the symmetric case where the countries are
  identical the global optimum lies on the
  efficiency frontier at the point where e1e2.
• We will denote these symmetric globally optimal
  emission levels by e .

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• The 3rd Figure also highlights the core of the
  Nash equilibrium.
• The core of the Nash equilibrium is the region of
  the efficiency frontier in which both countries
  are better-off than at the Nash equilibrium.
• It is bounded by the iso-cost contours passing
  through the Nash equilibrium.Note that the
  symmetric global optimum lies within the core.
• This means that both countries would agree to
  move to the global optimum (assuming cooperation
  can be supported) because both countries would be
  better-off than at the Nash equilibrium.

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The Asymmetric Case

• If countries are symmetric (either in abatement
  costs or damages) then the global optimum could
  lie outside the core of the Nash equilibrium.
• A move from the Nash equilibrium to the global
  optimum would make country 1 worse-off.

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2. Trade and the Environment
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(1) Introduction

• There is a bi-directional link between trade and
  the environment
• the production and consumption patterns
  associated with global trade have substantial
  environmental impacts and
• the policies designed to manage those impacts
  have important implications for competitiveness
  and the pattern of trade.

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(2) Trade and Resource Flows

• Consider a world in which the basis for trade is
  comparative advantage and world trade is
  competitive.
• There are three mains linkages between trade and
  the environment in such a world
• scale effect
• technique effect
• composition effect

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Scale Effect

• The scale effect relates to the increase in world
  production due to the gains from specialization
  and trade.
• The scale of world production rises and, ceteris
  paribus, the level of global pollution rises with
  it.
• Thus, the scale effect implies a negative link
  between trade and environmental quality.

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Technique Effect

• Trade leads to an increase in income and this in
  turn leads to a higher demand for environmental
  quality (assuming environmental quality is a
  normal good, an assumption which seems
  reasonable).
• The higher demand for environmental quality leads
  to market and political pressure for firms to
  adopt cleaner production techniques.
• Thus, the technique effect implies a positive
  link between trade and environmental quality.

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Composition Effect

• Trade leads to specialization according to
  comparative advantage.
• This means that the composition of production in
  any given country changes in response to trade.
• A country whose comparative advantage lies in
  producing pollution-intensive goods will
  experience a negative impact on environmental
  quality, while a country whose comparative
  advantage lies in goods with relatively clean
  production methods will experience a positive
  effect on environmental quality.
• Thus, the composition effect could work in either
  direction.

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(2) Trade and Competitiveness

• Imperfect global competition between
  international firms creates a strategic
  interaction between the countries in which those
  firms are based.
• Associated with trade flows are a flow of
  oligopoly rents. The possibility of capturing a
  greater share of those rents can lead national
  governments to set domestic policies that boost
  the competitive position of firms based in their
  countries and so allow them to capture a greater
  share of the global market.

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• Any environmental regulation that raises
  production costs is likely to be subject to
  distortion for strategic trade-related goals.
• Requiring that firms pay for the environmental
  damage they cause adds to the costs of production
  for those firms and so erodes their competitive
  position on world markets.
• National governments may therefore have an
  incentive to set lower emission prices than they
  would in the absence of trade.

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• There are other less obvious means by which
  national governments can affect trade flows
  through domestic environmental policy.
• For example, a country may require that producers
  take back their packaging (as Germany now does).
  This favours domestic firms.
• A country may mandate the use of a particular
  input, on environmental grounds, that favours
  domestic firms.
• The recycled paper content requirements in the US
  favour US paper producers over their Canadian
  competitors because the Canadian supply of
  recycled paper is relatively small.