Transboundary Pollution Externalities: Think Globally, Act Locally?

TL;DR

This paper examines how local environmental policies often neglect transboundary externalities, leading to suboptimal global pollution levels, and demonstrates that coordinated global action can significantly reduce pollution.

Contribution

It provides a comparative analysis of local versus global pollution control strategies in a spatial setting, highlighting the importance of considering externalities for optimal policymaking.

Findings

Local solutions are suboptimal without considering externalities

Stringent local policies can reduce global pollution levels

Global cooperation can lead to pollution-free equilibrium

Abstract

We analyze the implications of transboundary pollution externalities on environmental policymaking in a spatial and finite time horizon setting. We focus on a simple regional optimal pollution control problem in order to compare the global and local solutions in which, respectively, the transboundary externality is and is not taken into account in the determination of the optimal policy by individual local policymakers. We show that the local solution is suboptimal and as such a global approach to environmental problems is effectively needed. Our conclusions hold true in different frameworks, including situations in which the spatial domain is either bounded or unbounded, and situations in which macroeconomic-environmental feedback effects are taken into account. We also show that if every local economy implements an environmental policy stringent enough, then the global average level of pollution will fall. If this is the case, over the long run the entire global economy will be able to achieve a completely pollution-free status.