Abstract
In this paper, we develop a dynamic decision model of transboundary basin pollution with emission permits trading and pollution abatement investment. In our model, the stock of pollution abatement evolves according to the standard capital accumulation dynamics equation, the emission permits are bought or sold at price which is be determined by the equilibrium conditions of the permit market. The main objective of this paper is to explore the optimal levels of pollution emission and emission abatement investment under the regions’ non-coalition and coalition strategies, such that the discounted stream of regions’ net revenues is maximized. Our results show that (i) the upstream coalition can help the upstream region to increase the pollution abatement investment and decrease the pollution emission; (ii) in contrast, the downstream coalition can help the midstream region to increase the pollution abatement investment and decrease the pollution emission
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