Essays on International and Environmental Economics: A Game-theoretic Approach

Abstract

Cooperative actions on climate change are difficult to achieve due to asymmetries among countries and free-rider incentives. In addition, the effectiveness of non-cooperative actions is undermined by carbon leakage. Using a game-theoretic analysis, the aim of this thesis is to study and evaluate the impact of different measures to mitigate climate change. The first essay in the thesis discusses the main features of the interaction among countries in mitigating climate change. We explain the trade-off between individual rationality and efficiency and demonstrate ways in which asymmetries among countries could affect the outcomes of climate negotiations.
The second essay investigates the incentives of governments when designing their non-cooperative climate policies under different policy regimes. We study the effect of a gradual shift from bilateral production-based carbon taxes to unilateral or bilateral consumption-based ones, considering various forms of trade measures called border carbon adjustments (BCAs). We find that although profit-shifting and carbon leakage distortions are only eliminated by combining carbon tariffs with a full export rebate, the optimal tax may still be below individual marginal damages. In contrast, a bilateral consumption-based tax could be set equal to or even above individual marginal damages.
The third essay investigates the conditions under which a sequence of escalating penalties of BCA-measures could be successful in enforcing a fully cooperative agreement. We show that import tariffs are the least distortionary policy instrument but the weakest punishment, and import tariffs with a full export rebate is the most distortionary instrument if implemented but the harshest punishment to enforce cooperation. However, whenever full cooperation is be expected to generate the highest global welfare gains, the harshest punishment fails to establish cooperation.
The fourth essay analyses the role of BCAs in a setting where the location of firms is chosen endogenously and countries choose their carbon taxes simultaneously or sequentially. We find that without BCAs, a 'race to the bottom' is the Nash equilibrium. In a Stackelberg equilibrium, a second less negative ‘chicken equilibrium’ may emerge. With BCAs, the race-to-the-bottom in carbon taxes can be avoided in the Nash equilibrium. However, a Nash equilibrium may not exist due to the discontinuity of best response functions. BCAs always reduce global emissions and in most cases increase global welfare under sequential choices of taxes.

Date of Award	19 Feb 2020
Original language	English
Awarding Institution	University of Bath
Sponsors	The Egyptian Government
Supervisor	Michael Finus (Supervisor), Javier Rivas Ruiz (Supervisor) & Paolo Zeppini (Supervisor)