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International Climate Games: From Caps to Cooperation

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Abstract

Greenhouse gas abatement is a public good, so climate policy is a public-goods game and suffers from the free-rider incentives that make the outcome of such games notoriously uncooperative. Adopting an international agreement can change the nature of the game, reducing or exacerbating the uncooperative tendencies of the players. We analyze alternative international agreements as variations of the public-goods game, and examine the incentives for cooperation under each alternative. The addition of cap-and-trade rules to the basic public-goods game is found to polarize the free-rider incentives of that game, encouraging those who would abate the most to target even higher abatement levels and those who would abate the least to target lower, and even negative, abatement levels. Such polarization between developed and developing countries is familiar from both the Kyoto and Copenhagen climate summits. Since cap-and-trade rules decrease cooperation by developing countries, developed countries are led to reject the game’s outcome and in the process prevent agreement on a set of quantity targets. To break this deadlock and shift the equilibrium toward cooperation, a modification of the public-goods game based on price rather than quantities is needed. This involves a global price target and equity transfers via a Green Fund that rewards adoption of and compliance with such a target. The Nash equilibrium of one such game is analyzed for a group of three countries similar to the United States, China and India.

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Bibliographic Info

Paper provided by University of Maryland, Department of Economics - Peter Cramton in its series Papers of Peter Cramton with number 10icg.

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Length: 20 pages
Date of creation: 2010
Date of revision: 2010
Publication status: Published in Research Paper, Global Energy Policy Center, July 2010
Handle: RePEc:pcc:pccumd:10icg

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Postal: Economics Department, University of Maryland, College Park, MD 20742-7211
Phone: (202) 318-0520
Fax: (202) 318-0520
Web page: http://www.cramton.umd.edu

Related research

Keywords: global warming; climate change; climate treaty; cap and trade; carbon tax; carbon price; public goods;

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References

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  1. Jean-Marc Burniaux & Jean Chateau & Rob Dellink & Romain Duval & Stéphanie Jamet, 2009. "The Economics of Climate Change Mitigation: How to Build the Necessary Global Action in a Cost-Effective Manner," OECD Economics Department Working Papers 701, OECD Publishing.
  2. Parkash Chander & Henry Tulkens, 2006. "Cooperation, Stability And Self- Enforcement In International Environmental Agreements : A Conceptual Discussion," Microeconomics Working Papers 22565, East Asian Bureau of Economic Research.
  3. Kosfeld, Michael & Okada, Akira & Riedl, Arno, 2006. "Institution Formation in Public Goods Games," Research Memorandum 029, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  4. Hutchinson Emma & Kennedy Peter W & Martinez Cristina, 2010. "Subsidies for the Production of Cleaner Energy: When Do They Cause Emissions to Rise?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-11, April.
  5. Godal Odd & Meland Frode, 2010. "Permit Markets, Seller Cartels and the Impact of Strategic Buyers," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-33, April.
  6. Odd Godal & Bjart Holtsmark, 2010. "International emissions trading with endogenous taxes," Discussion Papers 626,, Research Department of Statistics Norway.
  7. Bjart J. Holtsmark & Dag Einar Sommervoll, 2008. "International emissions trading in a non-cooperative equilibrium," Discussion Papers 542, Research Department of Statistics Norway.
  8. Barrett, Scott & Toman, Michael, 2010. "Contrasting future paths for an evolving global climate regime," Policy Research Working Paper Series 5164, The World Bank.
  9. Peter Cramton & Steven Stoft, 2009. "Global Carbon Pricing: A Better Climate Commitment," Papers of Peter Cramton 09gcp, University of Maryland, Department of Economics - Peter Cramton, revised 2009.
  10. Rand, David Gertler & Dreber, Anna & Fudenberg, Drew & Ellingson, Tore & Nowak, Martin A., 2009. "Positive Interactions Promote Public Cooperation," Scholarly Articles 3804483, Harvard University Department of Economics.
  11. Carbone, Jared C. & Helm, Carsten & Rutherford, Thomas F., 2008. "The Case for International Emission Trade in the Absence of Cooperative Climate Policy," Darmstadt Discussion Papers in Economics 35491, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute of Economics (VWL).
  12. Helm, Carsten, 2003. "International emissions trading with endogenous allowance choices," Journal of Public Economics, Elsevier, vol. 87(12), pages 2737-2747, December.
  13. Peter Cramton & Steven Stoft, 2010. "Price is a Better Climate Commitment," Papers of Peter Cramton 10pbcc, University of Maryland, Department of Economics - Peter Cramton, revised 2010.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. How to solve the Kyoto and Copenhagen climate gridlocks
    by Economic Logician in Economic Logic on 2010-08-27 14:24:00
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Cited by:
  1. Holtsmark, Bjart & Sommervoll, Dag Einar, 2012. "International emissions trading: Good or bad?," Economics Letters, Elsevier, vol. 117(1), pages 362-364.
  2. Bolton, Gary E. & Ockenfels, Axel, 2012. "Behavioral economic engineering," Journal of Economic Psychology, Elsevier, vol. 33(3), pages 665-676.

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