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

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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: Introduction1

Background1

Regulatory Influences3

Theoretical Framework5

Strategic R&D Rivalry7

Carbon taxes9

Investment hold-up10

Models for Learning11

No Learning11

Partial Learning12

Full Learning13

Relating the Three Models of Learning13

Theoretical Model14

Chapter 3: Methodology17

Firms18

Innovator19

Proposition 121

Regulator21

Proposition 222

Proposition 324

References25

Chapter 1: Introduction

Background

The impact of environmental compliance costs on foreign direct investment and the location decision of firms has been analysed in both theoretical and empirical economic literature. The issue has also been the subject of some debate among environmentalists, industry representatives, free trade advocates and other governmental and non-governmental organisations (Ulph, A. (1996); Jenkins, R. (1998); Keller and Levinson (1999)).

As Theoretical literature that deals with localisation decisions includes, among others, Motta and Thisse (1994), Markusen (1995), Ulph (1994), Ulph and Valentini (1997), Rauscher (1997), Petrakis and Xepapadeas (2000) and Xepapadeas (1999). Motta and Thisse (1994) assume a two-country economy with two firms, each of them located in one of the two countries and producing a homogeneous good. They analyse the way in which the environmental policy in a country impacts the location decision of local firms. They assume location independent variable production costs and constant and fixed relocation costs. They also assume that one country does not change its environmental policy stance.

They show that relocation depends on the size of the ...