Moral Concerns on Tradable Pollution Permits in International Environmental Agreements

Abstract

We investigate how moral concerns about permit trading affect an endogenous pollution permit trading equilibrium, where governments choose non-cooperatively the amount of permits they allocate to domestic industries. Politicians may feel reluctant to allow permit trading and/or may prefer that abatement is undertaken domestically due to moral concerns. This will have an effect on the initial permit allocations, and, therefore, on global emissions. The impact on global emissions depends on the precise formulation of the moral concerns, but under reasonable assumptions, we show that global emissions may increase. Thus, doing what is perceived as good does not always yield the desired outcome. However, this can be offset by restrictions on permit trading when governments have moral concerns about this trade.

Keywords: Tradable emission permits, international environmental agreements, non-cooperative game theory, moral motivation, identity

JEL Classification: D63, Q54