Optimal Abatement and Emission Permit Trading Policies in a Dynamic Transboundary Pollution Game

We obtain optimal emission levels and abatement expenditures in a finite-horizon transboundary pollution game with emission trading between two regions. We show that emission trading has significant impact on the optimal strategies and profits of the two regions. We find that cooperation between the regions leads to increased abatement and lower emissions, resulting in a lower pollution stock. We also provide a stochastic extension in which the pollution stock and the emission trading price are diffusion processes and solve it numerically.

Keywords: Transboundary Pollution, Differential Game, Pollution Abatement Strategies, Emission Permits Trading, Hamilton-Jacobi-Bellman Equation

Suggested Citation: Suggested Citation

Chang, Shuhua and Sethi, Suresh and Wang, Xinyu, Optimal Abatement and Emission Permit Trading Policies in a Dynamic Transboundary Pollution Game (April 10, 2018). Dynamic Games and Applications, 2018, pp.1–31 , Available at SSRN: https://ssrn.com/abstract=3160409