Abstract
Environmental economics deals with the optimal allocation of production factors and correcting market failure in protecting the environment. Market failure occurs because of externalities, common property resources, and public goods. Environmental policy instruments include direct regulation, taxes/subsidies, tradable permits, deposit systems, voluntary agreements, and persuasion.Environmental policies usually focus on one pollutant or environmental issue but may have substantial impacts on other emissions and environmental problems. Neglecting these impacts will result in suboptimal policies. We present an integrated optimisation model for determining cost-effective strategies to simultaneously reduce emissions of several pollutants from several sources, allowing for interrelations between sources and abatement options. Our integrated approach in regard to acidifying compounds and greenhouse gases will be able to provide cost-effective policy options that will result in lower overall abatement costs.This paper shows that efficient emission reduction can be calculated, but we argue that, for transboundary air pollution and climate change, it is difficult to implement the socially optimal solution because strong incentives exist for “free-riding”. In order to implement efficient policies, international environmental agree-ments like the Gothenburg or the Kyoto Protocol are necessary to establish stable coalitions. The stability of these agreements depends on the distribution of costs and benefits over countries and on the redistribution of the gains of cooperation.