Environmental Management Policy Under International Carbon Leakage

This article studies environmental management policy when two fossil‐fuel‐consuming countries noncooperatively regulate greenhouse‐gas emissions through emission taxes or quotas. The presence of carbon leakage caused by fuel‐price changes affects the tax‐quota equivalence. We explore each country's incentive to choose a policy instrument in a two‐stage policy choice game and find subgame‐perfect Nash equilibria. This sheds new light on the questions of which policy instrument is more stringent and of why adopted instruments could be different among countries. In particular, our result suggests a reason why developing countries tend to employ emission taxes whereas developed countries tend to adopt quotas.