Voluntary Supply of Greenhouse Gas Abatement and Emission Trading Equilibria

Abstract

This paper examines equilibria for a global pollution problem where the level of emission reduction is determined by voluntary and noncooperative supply of abatement by different countries. Starting from the Nash Cournot equilibrium, we give each country the possibility to buy or sell additional emission reduction at a fixed price in an international abatement market. We show in this paper that in a competitive market for emission abatement, the country with the highest willigness to pay for environmental quality determines the total level of emission reduction. It is also shown that this player is not necessarily better off under the competitive trading scenario compared to the Nash Cournot equilibrium without trade. In an empirical illustration the Nash Cournot sollution without trade is compared to a competitive and monopsonistic emission abatement trading equilibrium. In the monopsonistic trading case we distinguish between no price discrimination and perfect price discrimination. We conclude that some form of price discrimination by the monopsonistic is a necessary, though not a sufficient, requirement to achieve a Pareto improvement compared to the Nash Cournot equilibrium without trade.