Pollution content tariffs, environmental rent shifting, and the control of cross-border pollution

This paper considers the optimal unilateral policy for a country that imports a good from a neighbouring country and is harmed by pollution generated during the production of that good. If the foreign country has a variable abatement technology, then Home has an incentive to impose a tax on the pollution content of imports (a pollution content tariff). Foreign regulation of pollution does not eliminate Home's incentives to intervene, but instead may create rent-shifting opportunities. By making the right to pollute a scarce asset, foreign pollution quotas create rents that the home government can try to extract.