Free-Riding-Proof International Environmental Agreements

We study international free-riding-proof coalitions to solve trans-boundary environmental problems such as global warming. We show that the free-riding problem is rather serious so that a free-riding-proof coalition can consist of only a small number of countries. In the optimal coalitional structure, therefore, the world would be divided into many small groups. For each group, if countries are symmetric, their individual incentives to join a group are identical across the two regimes of environmental coalitions: the non-transferable utility (NTU) regime and transferable utility (TU) regime. If member countries are asymmetric, however, groups are more stable under the TU regime than under the NTU regime since the former regime enables the member countries to pool their incentives. International cooperation (within each group) on carbon taxes is shown to be equivalent to the NTU regime, while emission permit trading is shown to be equivalent to the TU regime. Therefore, the emission permit trading system can be considered to be superior in the world of asymmetric countries.