EFFICIENCY OF ENVIRONMENTAL-POLICY INSTRUMENTS IN A SPATIALLY ORGANIZED ECONOMY

This paper develops an efficiency criterion to evaluate environmental policy instruments in a spatial economy. We call an environmental policy regime at the regional level efficient if it guarantees not only an efficient distribution of emission permits within a region, but also an optimal distribution of mobile firms across the regions of a federation. Hence, an efficient instrument must guarantee that firms internalize environmental costs in choosing their location. Using marketable pollution rights or emission taxes, efficiency in this broad sense can only be achieved if revenues of regional environmental agencies are not transferred to regional firms. Direct controls neither support an optimal distribution of emission rights within a region nor an optimal locational pattern of firms.