Abstract
We analyze non-cooperative international climate policy in a setting of political competition by national interest groups. In the first stage, countries decide whether to link their domestic emission permit markets to an international market, which only forms if it is supported by all countries. In the second stage, countries non-cooperatively decide on the number of tradable emission allowances. In both stages, special interest groups try to sway the government in their favor. We find that (i) both the choice of regime and the levels of domestic and global emissions only depend on the aggregate levels of organized stakes in all countries and not on their distribution among individual interest groups and (ii) an increase in lobbying influence by a particular lobby group may backfire by inducing a change towards the lobby group's less preferred regime.
Highlights
When analyzing international policy, we often consider individual countries to be represented by a single benevolent decision maker, e.g. a government, acting in the best interest of the country as a whole
By political competition we mean that incumbent politicians do consider the welfare of the general electorate but are susceptible to the influence of lobby groups which try to sway them in their favor by providing campaign contributions, information or bribes
Lobby groups are assumed to maximize the total pay-off of their members, which is the organized stakes in national social welfare UiRj that the lobby group j in country i represents minus lobbying contributions in the first and second stage: Lij = UiRj − Ci1j,R + Ci2j,R, (3)
Summary
When analyzing international (environmental) policy, we often consider individual countries to be represented by a single benevolent decision maker, e.g. a government, acting in the best interest of the country as a whole. If a permit market has been put in place, an additional term enters the welfare function which captures the revenues from permit sales or the costs associated with permit purchases Within this framework, we analyze how national lobbying influences non-cooperative international environmental policy and if (and how) the distribution of special interest groups affects the equilibrium outcome. We find that the number of tradable or non-tradable emission allowances, depending on the type of regime, is determined by the aggregate level of organized stakes in both countries, as long as all lobby groups exhibit strictly positive contribution schedules. To determine the equilibrium in the first stage, we follow Grossman and Helpman (1995a) in their analysis of free trade agreements In contrast to their model setting, our model comprises a continuous policy variable in the second stage, the number of tradable or non-tradable allowances.
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