Environmental Policy Reforms in a Small Open Economy with Public and Private Abatement

Abstract

We construct a competitive general equilibrium model for a small open economy, which suffers from domestically production-generated pollution and as well as by cross-border pollution. Private producers and the country’s public sector sequentially undertake pollution abatement. We characterise the optimal levels of two policy instruments, viz. an emissions tax and funds allocated for public abatement activities, and examine how cross-border pollution affects these levels. We also establish necessary and/or sufficient conditions under which several comprehensive and partial reforms of the policy instruments, starting from arbitrary initial levels, raise welfare and/or lower the level of net pollution emissions.

This is a much revised version of “Reforms of Environmental Policies in the Presence of Cross-border Pollution and Two-stage Clean-up,” which was presented at the EURESCO Conference on the International Dimension of Environmental Policies, held at Aquafredda di Maratea, Italy, during 6–11 October 2001. The authors are grateful, for helpful comments, to the participants of the conference and in particular to Laura Marsiliani and the discussant Daniel Sturm, who also gave detailed comments on a revised version of the paper.