Efficiency in negotiated environmental agreements

In a Negotiated Environmental Agreement (NA) firms offer to abate emissions voluntarily in order to pre-empt mandated reduction of emissions. In the paper the NA is modelled as a type of matching: each firm offers individual abatement in return for collective abatement by the whole group of participating firms. The resulting level of group abatement and the allocation of abatement tasks is Pareto-efficient; it is however not fully cost-efficient. Although the NA does eliminate the X-inefficiency typical of direct regulation through uniform emission standards, the NA is not capable to remove the cost-inefficiency in the allocation of abatement tasks that is also characteristic of mandated uniform enission standards. In contrast, market based polution control instruments (emission taxes and emissions trading) pair X-efficiency with cost-efficiency in allocation. In ranking on efficiency the NA therefore stands between market based instruments and command-and-control. To our knowlledge this is the first and only paper that bases the efficincy ranking order of the three insruments of pollution control on the results of a formal model.