International Environmental Agreements: Uniform or Differentiated Abatement Standards

Most of the international environmental agreements that have been signed in the past to resolve transboundary pollution problems appear constrained in the sense that either monetary transfers accompany uniform abatement standards (agreements based on a uniform standard with monetary transfers), or differentiated abatement standards are established but without monetary transfers (agreements based on differentiated standards). For two asymmetric countries facing the challenge of a transboundary pollution problem, we compare the relative efficiency of these two second-best agreements in the case of quasi-linear utility functions. We especially study what role the costs associated with transfer payments across countries play in the choice of cooperative agreements. To conduct this analysis, we first construct the Pareto sets corresponding to each agreement. We next analyze the agreement which will be signed by both countries using the generalized Nash bargaining solution (1953). On the one hand, our results demonstrate the equivalence of the Pareto sets corresponding to the two agreements for one special case which coincides with the first-best solution. On the other hand, in the neighborhood of this case, we show the possible superiority of the agreement based on a uniform standard with transfers over that based on differentiated standards. In this case, the level of the costs associated with transfer payments must be sufficiently low compared to the relative marginal abatement costs of the countries in the differentiated agreement.