Climate Coalitions and their Persistent Ineffectiveness

The paper provides a fresh look at the literature on the formation of international environmental agreements by introducing into the classic model emissions and abatement as countries’ separate choice variables. The model’s structure is kept unchanged, assuming a two-stage game in which the internal and external stability conditions define coalition’s stability. We illustrate the way in which each of the three components of countries welfare, benefits from own emissions, damages from aggregate emissions and own abatement costs, interact in determining nonsignatories’ equilibrium choices, which in turn, determine the stable coalition’s size. We show that, ceteris paribus, as abatement becomes cheaper, nonsignatories become more responsive to signatories’ choices, strengthening the signatories’ leadership position, allowing thus, largest stable coalitions to be formed. However, when abatement costs are low the same choices are individually rational, that is, forming a coalition does not add much over the Nash. Furthermore, large stable coalitions are possible under high abatement costs, only if damages are high relative to benefits, but such coalitions require negative net emissions. Finally, in the absence of leadership, only very small coalitions are stable. Therefore, even if the coalition has leadership power in setting abatement and emission targets, the reduction of free-riding incentives is significant, yielding larger stable coalitions, only when it is welfare irrelevant, i.e., when the same targets are individually rational.