Local and Global Externalities, Environmental Policies and Growth

The research examines the interaction between local flow pollution and global stock pollution, specifically focusing on abatement activities that can target one or both. By comparing symmetric and asymmetric internalization scenarios, the authors demonstrate that the degree of internalization affects the capital-abatement ratio and long-run pollution stocks. The paper argues that achieving a first-best global welfare optimum requires two distinct policy instruments—such as taxes on both local and global pollutants—and that in asymmetric cases, subsidizing pollution reduction is superior to subsidizing abatement because the latter fails to correct for negative externalities from capital accumulation.

• The model distinguishes between two types of abatement: one that reduces only local pollution (e.g., particulate matter filters) and another that mitigates both local and global pollution (e.g., fuel saving technologies).
• In a scenario where only local externalities are internalized, the capital-abatement ratio is biased toward local pollution abatement because the mitigating effect on global pollution is ignored.
• Internalizing the global externality leads to a lower equilibrium capital-abatement ratio and a lower long-run pollution stock compared to internalizing only local externalities.
• Achieving a first-best solution requires two separate policy instruments, such as a tax on local pollution and a tax on global pollutants, because the induced market failures are not perfectly correlated.
• The optimal tax for local pollution should equal the marginal damage to current production, whereas the optimal tax for global pollutants must also account for future damages caused by the addition to the pollution stock.
• In asymmetric scenarios, subsidizing pollution reduction is the only way to achieve the global welfare optimum because it corrects for both the returns to abatement and the returns to capital.
• Subsidizing abatement instead of pollution reduction results in suboptimally high capital accumulation and growth in the receiving country because it fails to capture the negative externality from capital.

APA

Pittel, K., & Rübbelke, D. (2010). Local and Global Externalities, Environmental Policies and Growth. Basque Centre for Climate Change. https://www.bc3research.org/h6T8Uy8Nm4gFs0O/201010251116161103791392.pdf

Chicago

Pittel, Karen, and Dirk Rübbelke. Local and Global Externalities, Environmental Policies and Growth. Basque Centre for Climate Change, 2010. https://www.bc3research.org/h6T8Uy8Nm4gFs0O/201010251116161103791392.pdf.

Wikipedia

{{cite report |last1=Pittel |first1=Karen |last2=Rübbelke |first2=Dirk |title=Local and Global Externalities, Environmental Policies and Growth |publisher=Basque Centre for Climate Change |date=October 2010 |url=https://www.bc3research.org/h6T8Uy8Nm4gFs0O/201010251116161103791392.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{pittel2010local, author = {Pittel, Karen and Rübbelke, Dirk}, title = {{Local and Global Externalities, Environmental Policies and Growth}}, institution = {Basque Centre for Climate Change}, year = {2010}, month = oct, url = {https://www.bc3research.org/h6T8Uy8Nm4gFs0O/201010251116161103791392.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }