Cooperation on Climate-Change Mitigation†
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Cooperation on Climate-Change Mitigation†
Cooperation on Climate-Change Mitigation1Charles F. MasonDepartment of Economics and Finance. University of Wyoming Stephen PolaskyDepartment of Appli Cooperation on Climate-Change Mitigation†ied Economics, University of MinnesotaNori TaruiDepartment of Economics, University of HawaiiThis draft: 17 November, 2008AbstractWe model greenhouse gas (GHG) emissions as a dynamic game. Countries’ emissions increase atmospheric concentrations of GHG, which negatively affects all countries' welfar Cooperation on Climate-Change Mitigation†e. We analyze self-enforcing climate-change treaties that are supportable as subgame perfect equilibria. A simulation model illustrates conditions wheCooperation on Climate-Change Mitigation†
re a subgame perfect equilibrium supports the firstbest outcome. In one of our simulations, which is based on current conditions, we explore the strucCooperation on Climate-Change Mitigation1Charles F. MasonDepartment of Economics and Finance. University of Wyoming Stephen PolaskyDepartment of Appli Cooperation on Climate-Change Mitigation†t to gain from such a agreement.’ The authors (hank Stephen Salam, Akihlko Yanase, and the seminar participants at the University of Hawaii, (he ASSA Meetings In 2007, Doshisha. Japan Economic Association Meeting. Hitotsubashi, Tokyo Tech. Tokyo. Tsukuba, Kobe. Keio University, and (he Occasional Wo Cooperation on Climate-Change Mitigation†rkshop on Environmental and Resource Economics. The authors are responsible for any remaining errors.Cooperation on Climate-Change MitigationAbstractWCooperation on Climate-Change Mitigation†
e model greenhouse gas (GHG) emissions as a dynamic game. Countries’ emissions increase atmospheric concentrations of GHG, which negatively affects alCooperation on Climate-Change Mitigation1Charles F. MasonDepartment of Economics and Finance. University of Wyoming Stephen PolaskyDepartment of Appli Cooperation on Climate-Change Mitigation†ates conditions where a subgame perfect equilibrium supports the firstbest outcome. In one of our simulations, which is based on current conditions, we explore the structure of a self-enforcing agreement that achieves optimal climate change policy, what such a solution might look like, and which cou Cooperation on Climate-Change Mitigation†ntries have the most to gain from such a agreement.1. IntroductionGlobal environmental problems such as climate change, depletion of the ozone layer aCooperation on Climate-Change Mitigation†
nd loss of biodiversity have risen to the top of the world’s environmental agenda. For each of these problems there is a large scientific literature wCooperation on Climate-Change Mitigation1Charles F. MasonDepartment of Economics and Finance. University of Wyoming Stephen PolaskyDepartment of Appli Cooperation on Climate-Change Mitigation†on Climate Change (ĨPCC) concluded that continued emissions ol greenhouse gases (GHG) would likely lead lo significant warming over the coming centuries with the potential lor large consequent es on the global environment (ỈPCC 2007). Climate change and other global environmental problems, however, Cooperation on Climate-Change Mitigation†are particularly difficult to address because actions that address these problems impose private costs and generate a global public good. SuccessfullyCooperation on Climate-Change Mitigation†
addressing global public goods require concerted action by numerous sovereign countries. Sovereignty of nations implies that any international enviroCooperation on Climate-Change Mitigation1Charles F. MasonDepartment of Economics and Finance. University of Wyoming Stephen PolaskyDepartment of Appli Cooperation on Climate-Change Mitigation† goods because the self interest of each country is best served by having other countries bear the cost of addressing the problem while they free-ride on these efforts.A large number of prior studies have analyzed the benefits and costs of reducing greenhouse gas emissions (e.g., Cline 1992, Fankhou Cooperation on Climate-Change Mitigation†ser 1995, Manne and Richels 1992, Mendelsohn et al. 2000, Nordhaus 1991.1994, Nordhaus and Yang 1996, Nordhaus and Boyer 2000, Tol 1995; see Tol 2005Cooperation on Climate-Change Mitigation†
and 2007 for recent summaries). The release of the Stern Review (Stern el al. 2006), which argued lor much swifter and deeper cuts in GHG emissions thCooperation on Climate-Change Mitigation1Charles F. MasonDepartment of Economics and Finance. University of Wyoming Stephen PolaskyDepartment of Appli Cooperation on Climate-Change Mitigation†, Mendelsohn 2007, Nordhaus 2007, Tol and Yohe 200G, Weilzman 2007, Yohe el al. 2007). Tor the most part these studies do not analyze equilibrium in which countries can choose emissions strategically.1Analyzing countries' strategic interactions is crucial for understanding climate-change policy. As Cooperation on Climate-Change Mitigation†the negotiations over the Kyoto Protocol illustrate. countries can choose to participate or stay on the sidelines (c.g., US and China). Even if a counCooperation on Climate-Change Mitigation†
try chooses to participate, there are limited1An exception is Nordhaus and Yang(t996) which solved for an open-loop Nash equilibrium emissions allocatCooperation on Climate-Change Mitigation1Charles F. MasonDepartment of Economics and Finance. University of Wyoming Stephen PolaskyDepartment of Appli Cooperation on Climate-Change Mitigation†ge treaty obligations. Addressing questions of whether a country will choose to participate in a climate change agreement or will choose to comply with an agreement requires an analysis of the strategic interests of each country involved in climate change negotiations. A number of studies apply stat Cooperation on Climate-Change Mitigation†ic or repeated games to consider countries' strategic choice of GHG emissions (Barrett 2003, Finns 2001). Bosello et al. (2003), de Zeeuw (2008) and ECooperation on Climate-Change Mitigation†
yckmans and Tulkens (2002) incorporate the dynamics of GHG stock to analyze an international agreement on climate change. However, these studies focusCooperation on Climate-Change Mitigation1Charles F. MasonDepartment of Economics and Finance. University of Wyoming Stephen PolaskyDepartment of Appli Cooperation on Climate-Change Mitigation† a treaty member's welfare. Nordhaus and Yang (1996) investigate a dynamic game but assume that countries adopt open-loop strategies (where countties commit to future emissions at the outset of the game, and so are not necessarily subgame perfect equilibria). Yang (2003) studies a dynamic game allow Cooperation on Climate-Change Mitigation†ing for closed-loop strategies, but without including the role of punishment for potential defectors.A desirable model of international environmentalCooperation on Climate-Change Mitigation†
agreements as applied to problems such as climate change would include stock effects (so that the interaction is properly modeled as a dynamic, ratherCooperation on Climate-Change Mitigation1Charles F. MasonDepartment of Economics and Finance. University of Wyoming Stephen PolaskyDepartment of Appli Cooperation on Climate-Change Mitigation†dback strategies. To our knowledge, only a few papers include these ingredients. Dockner et al. (1996) and Dutta and Radner (2000, 2005) find conditions under which cooperative equilibrium can be supported as a subgame perfect equilibrium through use of a trigger strategy. In these models, once some Cooperation on Climate-Change Mitigation† country' cheats on the agreement by over-emitting, punishment begins and continues forever, in the climate change application, however, such a triggeCooperation on Climate-Change Mitigation†
r-strategy profile would involve mutually assured over-accumulation of GHGs if punishment were ever called for. A legitimate criticism of such strategCooperation on Climate-Change Mitigation1Charles F. MasonDepartment of Economics and Finance. University of Wyoming Stephen PolaskyDepartment of Appli Cooperation on Climate-Change Mitigation†is completed. In addition, most international sanctions are temporary in nature, calling into question the empirical relevance of strategies involving perennial punishment.22Based on 103 case studies of economic sanctions between World War I and 1984. Hufbauer et al. (1985) find (hat (he average len Cooperation on Climate-Change Mitigation†gth of successful and unsuccessful sanctions were 2.9 and 6.9 years. Success of a sanction is defined in terms of the extent to which the correspondinCooperation on Climate-Change Mitigation†
g foreign policy goal is achieved (p.79).-2-In this paper, we reconsider the problem of designing a self-enforcing international environmental agreemeCooperation on Climate-Change Mitigation1Charles F. MasonDepartment of Economics and Finance. University of Wyoming Stephen PolaskyDepartment of Appli Cooperation on Climate-Change Mitigation†y generates benefits for the countiy but also generates emissions that increase atmospheric concentrations of GHG, which negatively affect the welfare of all countries. Atmospheric concentrations evolve over time through an increase of concentrations from emissions of GHG and the slow decay of exist Cooperation on Climate-Change Mitigation†ing concentrations. We analyze a strategy profile in which each country initially chooses emissions that generate a Pareto optimal outcome (first bestCooperation on Climate-Change Mitigation†
or cooperative strategy) and continues to play cooperatively as long as all other countries do so. However, our strategies entail temporary punishmenCooperation on Climate-Change Mitigation1Charles F. MasonDepartment of Economics and Finance. University of Wyoming Stephen PolaskyDepartment of Appli Cooperation on Climate-Change Mitigation†t harsh punishment on the deviating country by requiring it to curtail emissions. In the second phase, all countries return to playing the cooperative strategy. The design of the two-phase punishment scheme guarantees that the punishment is sufficiently severe to deter cheating, and that all countri Cooperation on Climate-Change Mitigation†es will have an incentive to carry out the punishment if called upon to do so.We identify conditions under which this strategy can support the first-bCooperation on Climate-Change Mitigation†
est outcome as a subgame perfect equilibrium, i.e., when a self-enforcing international environmental agreement can generate an efficient outcome. WeGọi ngay
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