[Assessing the issue of government and firm commitment in the context of Climate Change Policy]

By

Acknowledgement

I would take this opportunity to thank my research supervisor; family and friends for their support and guidance without which this research would not have been possible.

DECLARATION

I, [type your full first names and surname here], declare that the contents of this thesis represent my own unaided work, and that the thesis has not previously been submitted for academic examination towards any qualification. Furthermore, it represents my own opinions and not necessarily those of the University.

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Abstract

Environmental regulation varies widely across countries. Gasoline taxes still differ strongly between the US, EU and Asian countries. The link between environmental policy and international trade policy makes it difficult to understand what drives current policies. In this paper, we study how governments can use gasoline taxes and R&D subsidies to reach strategic trade policy objectives and environmental objectives. We use a two country model where each country has a home producer that sells cars in both markets. Each car generates emissions via its fuel consumption. Governments use a fuel tax to control pollution. Our model is a variant of the Ulph and Ulph (2011) model, which is solved in three stages. First, both governments set gasoline. Second, each of the producers decides on fuel efficiency. Finally, producers compete in a Cournot game in both markets. Extensions of the model include asymmetric parameters and the introduction of a subsidy on R&D costs for fuel efficiency. The numerical simulations show encouraging insights. Our theoretical model is able to explain differences in tax policies as a result of market structure, spillovers in R&D and pollution valuation. Another interesting result is that a subsidy on R&D can only be welfare improving if governments cooperatively set optimal policy measures.

Table of Contents

ACKNOWLEDGEMENTII

DECLARATIONIII

ABSTRACTIV

CHAPTER 1: INTRODUCTIONI

Backgroundi

Regulatory Influencesiii

CHAPTER 2: LITERATURE REVIEWV

Theoretical Frameworkv

Strategic R&D Rivalryvii

Greenhouses Phenomenon and carbon taxix

Investment hold-upx

Models for Learningx

Changes in Climatex

Future Predicted Climatexi

Role of government in encouraging a positive 'investment climate' in the free marketxii

Theoretical Modelxii

CHAPTER 3: METHODOLOGYXV

Firmsxv

Innovatorxvi

Proposition 1xviii

Regulatorxix

Proposition 2xx

Proposition 3xxi

CHAPTER 4: DISCUSSION AND ANALYSISXXIII

The benchmark equilibriumxxiii

Estimating the model parametersxxiv

Benchmark outcomexxv

Sensitivity analysisxxvi

Introducing technology policyxxix

Social Learning and Ideasxxx

Learningxxxiii

Summaryxxxvi

CHAPTER 5: CONCLUSIONSXXXVIII

REFERENCESXL

Chapter 1: Introduction

Background

Global climate change and development policies to prevent its adverse effects include the most acute problems of today. Their particular relevance confirm conclusions of authoritative experts, according to which mankind is closely related to the threshold values of environmental load adverse trends in the climate situation, which is witnessing people around the globe. The situation is complicated by the fact that the search approaches and tools for solving this problem require not only a comprehensive view to justify from the economic perspective, but also provide a view of the tight time framework. The problem of prevention of adverse climate change is object not only research but also active socio-political discussions, during which often have opposing views. As scientific understanding of relevant issues, initially the most intensive, it was the representatives of natural sciences (Aldy, 2008, 17).

In-depth economic-theoretical studies, which began more than three decades ago, ...