Strategic environmental regulation of multiple pollutants

Abstract

We analyze the interplay between policies aimed to control global and local pollution such as greenhouse gases and particulate matter. The two types of pollution interact in the abatement cost function of the polluting firms through economies or diseconomies of scope. They are regulated by distinct entities (global versus local), potentially with different instruments that are designed according to some specific agenda. We show that the choice of regulatory instrument and the timing of the regulations matter for efficiency. Emissions of local pollution are distorted if the local regulators anticipate that global pollution will later be regulated through emission caps. The regulation is too (not enough) stringent when abatement e¤orts exhibit economies (diseconomies) of scope. In contrast, we obtain e¢ ciency if the global pollutant is regulated by tax provided that the revenues from taxing emissions are redistributed to the local communities in a lump-sum way.