Capital Growth in a Global Warming Model: Will China and India Sign a Climate Treaty?

Global warming is now recognized as a significant threat to sustainable development on an international scale. One of the key challenges in mounting a global response to it is the seeming unwillingness of the fastest growing economies such as China and India to sign a treaty that limits their emissions. The aim of this paper is to examine the differential incentives of countries on different trajectories of capital growth. A benchmark dynamic game to study global warming, introduced in Dutta and Radner (2009), is generalized to allow for exogenous capital accumulation. It is shown that the presence of capital execerbates the “tragedy of the common”. Furthermore, even with high discount factors, the threat of reverting to the inefficient “tragedy” equilibrium is not sufficient to deter the emissions growth of the fastest growing economies—in contrast to standard folk theorem like results. However, foreign aid can help. If the slower growth economies—like the United States and Western Europe—are willing to make transfers to China and India then the latter can be incentivized to cut emissions. Such an outcome is Pareto improving for both slower and faster growth economies.