On Environmental Externalities and Global Games

This dissertation investigates strategies to regulate environmental externalities. Chapter 1 studies the regulation of stock externalities under asymmetric information and future uncertainty. The chapter derives optimal tax and quota instruments that perform remarkably well, solving the asymmetric information problem almost entirely. This chapter also proves that an optimal tax policy converges to the hypothetical symmetric information outcome two orders or magnitude faster than an optimal quota policy. In contrast to the focus on novel policies in chapter 1, chapter 2 establishes two unintended yet undesirable side-effects of an existing policy. Due to a 2018 reform, the EU ETS features an endogenous cap on emissions. This chapter shows that, generally, such an endogenous emissions cap may lead to an increase in emissions in response to an anticipated future policy meant to reduce them. Moreover, discontinuities in the design of the EU ETS also introduce equilibrium multiplicity, exposing participating firms to additional uncertainty. Whereas chapters 1 and 2 study policies by a single policymaker, chapter 3 focuses on collaborations between independent policymakers regulating emissions in their own jurisdictions through a cap and trade scheme. The chapter shows that global welfare always increases after jurisdictions link their schemes and derives an optimal linkage. Though simple, the optimal linkage deviates substantially from existing policy proposals for linking. The final chapter uses the methodology of global games to study equilibrium selection in a coordination game where players must choose between clean and dirty technologies. The chapter also develops network subsidies. A network subsidy allows the policymaker to correct for the entire externality deriving from technological spillovers but does not, in equilibrium, cost the policymaker anything