Taxes versus quotas to limit global environmental risks: New insights into an old affair

Environmental problems with unknown emission abatement cost and damage are analyzed. The game under consideration is static, and its expected payoff structure displays a prisoners’ dilemma. Even in this most unfavorable setting cooperation might arise if the involved countries are sufficiently risk averse. It is shown that the degree of risk aversion necessary to foster cooperation depends on which environmental policy instruments (here, quotas or charges) are chosen. Moreover, there is a strategic interdependence by which one country may further the other country’s willingness to cooperate. The choice of environmental policy instruments turns out to be crucial also in this latter context. © 2000, Springer Japan.