On coordination of abatement in voluntary agreements

Abstract

The negotiated agreement (NA) -- the strictest form of a voluntary agreement -- is modeled as a coordination device to exchange emission abatement offers between firms to preempt environmental regulation. We find that the NA is Pareto efficient and that the potential cost savings to be derived from a NA increases with firm heterogeneity. The NA realizes almost all of the cost savings when the potential cost savings are low and it realizes only a fraction of the cost savings if the savings are potentially high. Consequently, the cost savings under a NA are typically smaller than those achievable by market-based policy instruments, in spite of the NA being Pareto efficient.