Emission Markets Linkage and Strategic Environmental Policy

ABSTRACT This study develops a strategic environmental policy model with linked emission permit markets. We examine whether a cooperative outcome can emerge when exporting countries act non‐cooperatively. We endogenize the participation decision through a specific permit revenue‐sharing scheme. This allows the cooperative outcome to be sustained as a subgame perfect Nash equilibrium. Asymmetries across countries regarding abatement technologies and environmental preferences affect the optimal distribution of the permit revenue. Whenever these asymmetries remain within a certain range, the cooperative outcome in the non‐cooperative solution is implementable.