Financial Instruments for the Control of Transboundary Pollution

Nentjes, A. (1994). Financial Instruments for the Control of Transboundary Pollution. IIASA Working Paper. IIASA, Laxenburg, Austria: WP-94-024

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Abstract

International agreements to protect the environment usually have the form of promises between countries to reduce pollution on a reciprocal base. Such a solution can be Pareto-efficient if transboundary pollution is reciprocal and, on top of that, negotiators reveal truly the preferences of their governments for environmental quality and the national costs of pollution control.

However, there are conditions under which the outcomes in terms of welfare gains can be improved by making payments between countries a part of the deal. The paper discusses the following categories:

(1) International money payment in exchange for additional pollution control abroad and simultaneous reduction of control effort at home as a complement to existing international agreements: Joint Implementation.

(2) Money transfers as an instrument to make an agreement on transboundary pollution feasible: control of unidirectional pollution and (ambitious) proportional reciprocal reduction of emissions belong to this class.

(3) International care. A country cares about the environment, or about the standard of living in another country. At first sight such considerations of international care seem to offer an argument for international subsidies. However, it will be shown that this is not necessarily so, since care considerations are already reflected in the 'rates of exchange' of the agreement to reduce emissions reciprocally.

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