Dynamic Games of International Pollution Control: A Selective Review

A differential game is the natural framework of analysis for many problems in environmental economics. This chapter focuses on the game of international pollution control and more specifically on the game of climate change with one global stock of pollutants. The chapter has two main themes. First, the different noncooperative Nash equilibria (open loop, feedback, linear, nonlinear) are derived. In order to assess efficiency, the steady states are compared with the steady state of the full-cooperative outcome. The open-loop Nash equilibrium is better than the linear feedback Nash equilibrium, but a nonlinear feedback Nash equilibrium exists that is better than the open-loop Nash equilibrium. Second, the stability of international environmental agreements (or partial-cooperation Nash equilibria) is investigated, from different angles. The result in the static models that the membership game leads to a small stable coalition is confirmed in a dynamic model with an open-loop Nash equilibrium. The result that in an asymmetric situation transfers exist that sustain full cooperation under the threat that the coalition falls apart in case of deviations is extended to the dynamic context. The result in the static model that farsighted stability leads to a set of stable coalitions does not hold in the dynamic context if detection of a deviation takes time and climate damage is relatively important.