Piecemeal Multilateral Environmental Policy Reforms under Asymmetric Oligopoly

Abstract We develop a general two‐country model with oligopolistic interdependence in which a fixed number of firms make their output and emission decisions simultaneously. We examine the effect of multilateral reforms of emission taxes on global emission levels. With sufficient asymmetry in pollution intensities between the two countries, a proportional multilateral increase in emission tax rates can increase global emission levels. However, a multilateral equal increase of emission tax rates unambiguously reduces global emission levels. We also consider the case of free entry and exit of firms, and find a rule of multilateral reforms which unambiguously lowers total emission levels.