Emission control game with unidirectional transfrontier pollution linked to global pollution

This paper prodives non-cooperative and cooperative game models in which two countries decide strategically when to reduce unidirectional transfrontier pollution. A typical case is considered that the transfrontier pollution is positively related to emission of greenhouse gases (GHGs) and environmental investment of victim country may be approved as a Clean Development Mechanism (CDM) under the Kyoto Protocol. A real option game is presented for investment with consideration of stock effect of GHGs and damage cost uncertainty. In the non-cooperative game in which emission is controlled unilaterally and CDM is not considered, victim and emission source countries invest at the same time while delaying the timing. Cooperative policy induces earlier investment of victim country when the gain of emission credit transfers is substantial. However, uncertainty on damage cost undermines the incentive of environmental investment.