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Uncertainty and International Climate Change Negotiations

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  • Yiyong Cai
  • Warwick J. McKibbin

Abstract

This paper explores the failure of countries to coordinate climate policies as an equilibrium outcome of a game where countries optimize in the face of both unprecedented economic and environmental uncertainty. Because issues associated with climate change are historically unprecedented and thus policymakers do not have a prior distribution over possible outcomes, the usual theoretical framework based on governments maximizing expected utility may not be suitable for analyzing climate policy choice. Under an alternative plausible assumption that policymakers act strategically but choose the policy that incurs the highest possible gain in the worst-case scenario, this paper shows how coordination can be inferior to unilateralism in both carbon mitigation and economic loss minimization. In order to make progress in reaching a global agreement in this situation, additional restrictions that help to reduce uncertainty can lead to a coordinated outcome that benefits the environment and minimizes economic cost.

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File URL: http://cama.crawford.anu.edu.au/pdf/working-papers/2013/132013.pdf
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Bibliographic Info

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2013-13.

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Length: 30 pages
Date of creation: Mar 2013
Date of revision:
Handle: RePEc:een:camaaa:2013-13

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Keywords: climate change; policy game; coordination; robust control;

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References

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  1. Kehoe, Patrick J, 1989. "Policy Cooperation among Benevolent Governments May Be Undesirable," Review of Economic Studies, Wiley Blackwell, vol. 56(2), pages 289-96, April.
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  17. Hoel, Michael, 1991. "Global environmental problems: The effects of unilateral actions taken by one country," Journal of Environmental Economics and Management, Elsevier, vol. 20(1), pages 55-70, January.
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