Analysis Of The Differential Game Of Climate Policy And Its Environmental Effect

The problem of climate change attracts extensive attention worldwide. It is commonlyacknowledged that the quality of global environment is an international public good, theaccumulation of carbon dioxide result from the pollution all around the world. For the lack ofproperty, all the governments use the instructions named climate policy to deal with the problem.Based on the realistic background, the paper did a literature review of the mechanism andeffects of three different climate policies, named carbon tax policy, carbon tariff policy andcarbon emission cooperation policy respectively. Then based on the theory of intra-industry tradeand differential game, where are studies the stock of carbon emissions with the two countriesdifferential game models in the condition of global warfare maximization, analysis the effect ofcarbon tax, carbon tariff and carbon emission cooperation policy towards global warfare, and getthe optimal carbon tax rate and carbon tariff rate in a stationary Markov perfect Nash equilibriumby Hamilton-Jacobi-Bellman equation.The results show that given the same level of carbon emission, global welfare weights leastwith one side policy of carbon tax, more with carbon tariff and most with carbon emissioncooperation. But when it comes to stock of carbon emissions, the largest amount lies with oneside policy of carbon tax, the next largest with carbon tariff and the least with carbon emissioncooperation. Besides, in terms of effects of global carbon emission, the most useful one is carbonemission cooperation, less useful would be carbon tariff and the least useful policy is one sidepolicy of carbon tax. This is because in the presence of carbon tax, there exists “carbon leakage”and “free-riding effect”, in which the foreign country enjoys a future improvement in globalenvironmental quality without incurring costs for pollution control, which is implemented in thehome country. At the same time, a tougher environmental policy in the home country enhancesthe competitiveness of the foreign firm because of an increase in the home firm’s pollutionabatement costs, this is called “rent-shifting effect”. Then the carbon tariff and carbon emissioncorporation policy can be partially or completely eliminate these effects.