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Global emission ceiling versus international cap and trade: What is the most efficient system when countries act non-cooperatively?

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Abstract

We model climate negotiations as a two-stage game. In the first stage of the game, players have to agree on a global emission cap (GEC). In the second stage, they non-cooperatively choose either their emission level or their emission quota, depending on whether emission trading is allowed, under the cap that potentially binds them together. A three heterogenous player quadratic game serves as a base for the analysis. In this framework, when the cap is non-binding, there exists a unique Nash equilibrium. When the emission cap is binding, among all the coupled constraints Nash equilibria, we select a normalized equilibrium by solving a variational inequality, which has a unique solution. In both scenarios – with and without emission trading – we show that there exists a non-empty range of values for which setting a binding cap improves all players’ payoff. It also appears that for some values of the cap, all players get a higher payoff under the GEC system alone than under the international cap and trade (ITC) system alone. Thus, the introduction of a GEC outperforms the ITC system both in terms of emission reduction and of payoff gains.

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Bibliographic Info

Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 275.

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Date of creation: 21 Feb 2011
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Handle: RePEc:sef:csefwp:275

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Keywords: environmental game; climate change; international cap and trade system; national emission quotas; global emission cap; normalized equilibria; variational and quasi-variational inequalities.;

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Cited by:
  1. M. Beatrice Lignola & Jacqueline Morgan, 2013. "Asymptotic Behavior of Regularized OptimizationProblems with Quasi-variational Inequality Constraints," CSEF Working Papers 350, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.

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