Competing firms, competing regulators: The strategic cost of fragmented climate policy

2026-06-15

AI Summary

This study addresses the inefficiencies and equity concerns arising from fragmented climate policy implementation across jurisdictions in global network industries, where firms operate through integrated networks. The authors develop a two-stage game-theoretic model to analyze how firms compete in pricing, service capacity, and capital allocation following regulators’ imposition of emissions charges, and how these strategic interactions are shaped by governance structures. The analysis reveals that uniform regulation is optimal under symmetric markets, whereas decentralized regulation performs better under market asymmetry. By incorporating regional heterogeneity into the design of differentiated emissions charges and transfer mechanisms, the framework achieves maximal aggregate welfare while mitigating distributional inequities. The effectiveness of combining global coordination with region-specific differentiation is validated through case studies of aviation markets in North America, Western Europe, and transatlantic routes, supported by mechanism design theory and numerical simulations.

Abstract

Climate policy in global network industries is implemented across fragmented jurisdictions, yet firms respond through integrated operational networks. We develop a two-stage game-theoretic framework to analyze how firm-level responses interact with alternative governance structures. Regulators first choose emissions charges. Firms subsequently compete through pricing, service capacity and capital deployment decisions. The analytical results demonstrate that uniform global regulation maximizes welfare in symmetric markets. However, in sufficiently asymmetric markets, a uniform global charge is dominated by decentralized regimes. Multiple regulatory instruments better accommodate region-specific market externalities. We apply this framework to a calibrated case study of North American, Western European and transatlantic aviation markets. The numerical results establish that a globally coordinated regulator setting region-specific charges achieves the highest aggregate welfare. These aggregate gains nonetheless mask substantial distributional disparities across jurisdictions. Effective climate governance in network industries therefore requires more than determining an efficient emissions charge. Policy instruments ought to accommodate regional heterogeneity and transfer mechanisms will be necessary to ensure efficient, politically stable cooperation.

Problem

• climate policy
• fragmented regulation
• network industries
• jurisdictional asymmetry
• emissions charges

Innovation

• game-theoretic framework
• fragmented climate policy
• network industries
• asymmetric markets
• region-specific regulation