Assume there are two regions with a joint emission trading system. The government of region I can influence its abatement costs by investment. The abatement cost function is written as C^I(e_I,k)+k where k is measured in monetary units. Assume that:

The other region’s abatement cost function is simply C_II(e_II).

(a) Investigate the comparative effects of a unilateral investment lowering (marginal) abatement costs on emissions in regions I and II and on the permit price.

(b) Determine the unilaterally optimal level of investment in region I.

(c) Determine non-cooperative and cooperative investment levels for both regions.

Transcribed Image Text:

-C (e,k) <0, C/(e,k) <0.