Cornelia Ohl

Taxes versus quotas to limit global environmental risks: new insights into an old affair

Environmental problems with unknown emission abatement cost and damage are analyzed. The game under consideration is static, and its expected payoff structure displays a prisoners’ dilemma. Even in this most unfavorable setting cooperation might arise if the involved countries are sufficiently risk averse. It is shown that the degree of risk aversion necessary to foster cooperation depends on which environmental policy instruments (here, quotas or charges) are chosen. Moreover, there is a strategic interdependence by which one country may further the other country’s willingness to cooperate. The choice of environmental policy instruments turns out to be crucial also in this latter context.

Inducing Environmental Co-operation by the Design of Emission Permits

Strategies of international risk management, as the implementation of tradable emission permits, feed back to the incentive structure of a treaty like the Kyoto Protocol. Discussing the Kyoto Protocol the question was: Should there be any restrictions on the trading of emission permits or not? With the help of a simple two country model it is shown that the enforcement of environmental treaties critically depends on the type and the intensity of national risk preferences. Assuming that the ‘global alliance of risk’ decreases with each co-operative contribution risk aversion is a prerequisite for enhancing the chances of global risk management. It is moreover the national intensity of risk aversion that determines whether trade should be restricted or not. In order to improve international coalition formation less risk averse countries might be able to “dictate” the rules of the game, here: the design of the permit regime.