We characterize the optimal policy and policy instruments for self-enforcing treaties when countries invest in green technology before they pollute. If the discount factor is too small to support the ﬁrst best, then both emissions and investments will be larger than in the ﬁrst best, when technology is expensive. When technology is inexpensive, countries must instead limit or tax green investment in order to make future punishment credible. We also uncover a novel advantage of price regulation over quantity regulation, namely that when regulation is suﬃciently ﬂexible to permit ﬁrms to react to non-compliance in another country, the temptation to defect is reduced. The model is tractable and allows for multiple extensions.
climate change environmental agreements green technology policy instruments repeated games compliance self-enforcing treaties