International Transfer, Environmental Policy, and Welfare

This paper examines the effects of international transfer on pollution permits, which are determined non-cooperatively by a donor and a recipient. First, we show that the untied international transfer decreases the pollution permits of the recipient, and may be welfare-improving for both countries if pollution is transboundary. Second, we introduce a full-compensatory emission-contingent transfer and show that it may reduce the emission of pollution in the recipient country and may increase the welfare of the donor, while keeping the recipient’s welfare constant.