Cooperative Governance of Inter-provincial air pollution based on a Black–Scholes Options Pricing Model

Abstract

The global atmospheric environment is becoming more and more seriously polluted. Governments are paying increasing attention to the environmental governance. To support their efforts, a range of financial instruments have been applied. In the present study, we proposed a cooperative inter-provincial air pollution governance model based on Black–Scholes options pricing. First, we developed a Black–Scholes model and used it to deduce the spot price of options. Second, we established an optimal pollutant reduction model for each province in a cooperative game, and used minimum core method to distribute the cooperative income rationally. Finally, we selected the three provinces in China’s Fenwei Plain region as examples to illustrate the use of our model in empirical analysis. We found that compared with the traditional non-cooperative territorial management model, the cooperative inter-provincial air pollution governance model based on options pricing decreased the total environmental governance cost in the Fenwei Plain by 4.64% and reduced the environmental governance cost in all three provinces, demonstrating that the cooperative governance model is effective and practical. Based on these results, our model provides an important reference for either national or regional decision-making, and we recommend that Chinese government promote the use of cooperative governance to achieve win–win cooperation among the provinces. By using this model efficiency of the use of environmental resources can be increased and the cost of environmental governance can be reduced.