Voluntary Agreements, Flexible Regulation and CER: Analysis of Games in Developing Countries and Transition Economies

Abstract

In this paper, we study the implementation of environmental voluntary agreements (EVA) in developing countries and transition economies to effectively motivate firms to take corporate environmental responsibility. We uses flexible regulation (FR) as the background pressure of EVA and present a four-stage game-theory model to explore under which conditions firms will comply the law and take environmental responsibility. We find that EVA could be the equilibrium outcome as long as existence of the background pressure, and the equilibrium level of abatement could exceed the standard of legislation when the background pressure of FR is large enough or the unit cost of abatement under EVA is low enough, or the social cost of capital is low enough. We also identify that the increase of abatement level will not increase firm's abatement cost in EVA, and sometimes even be lower with the support of technology and cost-sharing assistance in EVA. In addition, we suggest that the firm can actively choose the first-best level of taking environmental responsibility before participating into EVA, which can minimize the total abatement cost.