Optimal control for transboundary pollution under inter-temporal transfer of emission permits: A differential game approach

Abstract

Emission permits are widely used as a policy tool to combat environmental change and regulators sometimes allow emission permits for inter-temporal banking and borrowing so that companies can respond flexibly to market uncertainties. In this paper, we apply inter-temporal transfer of emission permits to transboundary pollution for the first time, construct a transboundary pollution model based on differential game theory, and spatial dimensions are taken into account at the same time. Our findings indicate if the underlying cost fluctuation is sufficiently large, then the regulator should ban inter-temporal banking and borrowing under the noncooperative and cooperative model. In contrast, our findings also suggest that the region with geographical advantage can exert this advantage under the noncooperative model, but the region with geographical advantage loses this advantage under the cooperative model. Moreover, when should the regulators allow or prohibit the inter-temporal transfer of emission permits is not affected by whether regulators cooperate with each other.