Climate Coalitions with Sophisticated Policy Makers

We study the formation of international climate coalitions with sophisticated policy makers. They strategically predict the consequences of their membership decisions in climate negotiations and use an integrated assessment model of the economy and the climate in their decision making. We analytically characterise the equilibrium number of coalitions and their number of signatories with certain types of heterogeneity. The special structure of our model drastically reduces the computational complexity of coalition formation with heterogeneous countries. We also investigate numerically possible coalition outcomes for a calibrated model with an exhaustible and inexhaustible energy sector. In contrast to earlier approaches to coalition formation based on internal and external stability, much larger coalitions can be sustained in equilibrium alongside smaller ones. Sophisticated policy makers thus give rise to more mitigation of global warming.