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International Climate Games: From Caps to Cooperation

Greenhouse gas abatement is a public good, so climate policy is a public-goods game and suffers from the free-rider incentives that make the outcome of such games notoriously uncooperative. Adopting an international agreement can change the nature of the game, reducing or exacerbating the uncooperative tendencies of the players. We analyze alternative international agreements as variations of the public-goods game, and examine the incentives for cooperation under each alternative. The addition of cap-and-trade rules to the basic public-goods game is found to polarize the free-rider incentives of that game, encouraging those who would abate the most to target even higher abatement levels and those who would abate the least to target lower, and even negative, abatement levels. Such polarization between developed and developing countries is familiar from both the Kyoto and Copenhagen climate summits. Since cap-and-trade rules decrease cooperation by developing countries, developed countries are led to reject the game’s outcome and in the process prevent agreement on a set of quantity targets. To break this deadlock and shift the equilibrium toward cooperation, a modification of the public-goods game based on price rather than quantities is needed. This involves a global price target and equity transfers via a Green Fund that rewards adoption of and compliance with such a target. The Nash equilibrium of one such game is analyzed for a group of three countries similar to the United States, China and India.

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Paper provided by University of Maryland, Department of Economics - Peter Cramton in its series Papers of Peter Cramton with number 10icg.

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Length: 20 pages
Date of creation: 2010
Date of revision: 2010
Publication status: Published in Research Paper, Global Energy Policy Center, July 2010
Handle: RePEc:pcc:pccumd:10icg
Contact details of provider: Postal: Economics Department, University of Maryland, College Park, MD 20742-7211
Phone: (202) 318-0520
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  1. CHANDER, Parkash & TULKENS, Henry, . "Cooperation, stability, and self-enforcement in international environmental agreements: a conceptual discussion," CORE Discussion Papers RP 2092, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. repec:dar:ddpeco:35491 is not listed on IDEAS
  3. Peter Cramton & Steven Stoft, 2010. "Price is a Better Climate Commitment," Papers of Peter Cramton 10pbcc, University of Maryland, Department of Economics - Peter Cramton, revised 2010.
  4. Bjart J. Holtsmark & Dag Einar Sommervoll, 2008. "International emissions trading in a non-cooperative equilibrium," Discussion Papers 542, Statistics Norway, Research Department.
  5. Michael Kosfeld & Akira Okada & Arno Riedl, 2006. "Institution Formation in Public Goods Games," IEW - Working Papers 299, Institute for Empirical Research in Economics - University of Zurich.
  6. Barrett, Scott & Toman, Michael, 2010. "Contrasting future paths for an evolving global climate regime," Policy Research Working Paper Series 5164, The World Bank.
  7. Jean-Marc Burniaux & Jean Château & Rob Dellink & Romain Duval & Stéphanie Jamet, 2009. "The Economics of Climate Change Mitigation: How to Build the Necessary Global Action in a Cost-Effective Manner," OECD Economics Department Working Papers 701, OECD Publishing.
  8. Carbone, Jared C. & Helm, Carsten & Rutherford, Thomas F., 2009. "The case for international emission trade in the absence of cooperative climate policy," Journal of Environmental Economics and Management, Elsevier, vol. 58(3), pages 266-280, November.
  9. Peter Cramton & Steven Stoft, 2009. "Global Carbon Pricing: A Better Climate Commitment," Papers of Peter Cramton 09gcp, University of Maryland, Department of Economics - Peter Cramton, revised 2009.
  10. Helm, Carsten, 2003. "International emissions trading with endogenous allowance choices," Journal of Public Economics, Elsevier, vol. 87(12), pages 2737-2747, December.
  11. Godal Odd & Meland Frode, 2010. "Permit Markets, Seller Cartels and the Impact of Strategic Buyers," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-33, April.
  12. Hutchinson Emma & Kennedy Peter W & Martinez Cristina, 2010. "Subsidies for the Production of Cleaner Energy: When Do They Cause Emissions to Rise?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-11, April.
  13. Rand, David Gertler & Dreber, Anna & Fudenberg, Drew & Ellingson, Tore & Nowak, Martin A., 2009. "Positive Interactions Promote Public Cooperation," Scholarly Articles 3804483, Harvard University Department of Economics.
  14. Odd Godal & Bjart Holtsmark, 2010. "International emissions trading with endogenous taxes," Discussion Papers 626, Statistics Norway, Research Department.
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