Emission Standards Versus Emission Taxes with Foreign Firms

Abstract

Extending Lahiri and Ono’s (2007) model of an oligopoly with emission regulation, by incorporating a foreign rival, we compare the effectiveness of a relative emission standard versus an emission tax. We consider following two cases. In the first case, where only the home/domestic country unilaterally implements policies, an emission standard is Pareto superior to an emission tax, whereas it is unclear which policy is better for the foreign country. In the second case, where both countries simultaneously choose environmental protection, the home country prefers a standard to a tax, while foreign country prefers a tax to a standard.