International environmental agreements: how the policy instrument affects equilibrium emissions and welfare

Two countries, differing with respect to opportunity cost of abatement and environmental damage cost, negotiating joint emission reductions are considered. The bargaining process is analyzed in two policy regimes: Emission tax and transferable discharge permits. Emissions and welfare of the bargaining equilibria under these regimes are compared to each other and to the social optimum. The conditions for the superiority of the tax over the permit regime and vice versa are specified.