Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/198957 
Year of Publication: 
2019
Series/Report no.: 
CESifo Working Paper No. 7597
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
It is tricky to design local regulations on global externalities, especially so if firms are mobile. We show that when costs and outside options are firms’ private information, the threat of firm relocation leads to local regulations that are stricter, not looser. This result is general and follows because policy-driven information rents act as targeted compensations to firms that can efficiently limit the externality. The optimal mechanism supplements this strict local regulation with a looser opt-in scheme, creating a global cap for externalities for a subset of firms. We illustrate the magnitude of these effects by providing a quantification of the optimal mechanism for the key sectors in the EU emissions trading system.
Subjects: 
externalities
mechanism design
private information
climate change
emissions trading
carbon leakage
JEL: 
D82
L51
Q54
Q58
Document Type: 
Working Paper
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