Designing the Optimal International Climate Agreement with Variability in Commitments

We analyze the design of an international climate agreement. In particular, we consider two goals of such an agreement: overcoming free-rider problems and adjusting for differences in mitigation costs between countries. Previous work suggests that it is difficult to achieve both of these goals at once under asymmetric information because countries free ride by exaggerating their abatement costs. We argue that independent information collection (investigations) by an international organization can alleviate this problem. In fact, though the best implementable climate agreement without investigations fails to adjust for individual differences even with significant enforcement power, a mechanism with investigations allows adjustment and can enable implementation of the socially optimal agreement. Furthermore, when the organization has significant enforcement power, the optimal agreement is achievable even with minimal investigative resources (and vice versa). The results suggest that discussions about institutions for climate cooperation should focus on information collection as well as enforcement.