Global Climate Change Mitigation: Strategic Interaction or Unilateral Gains?

Global agreement to reduce carbon emissions has been weakened by slowing growth and burden sharing conflicts. This paper examines strategic interaction amongst regions by simplifying the policy choice to that between carbon taxation and free riding. Benefits from climate change mitigation are constructed via a meta-analysis of existing studies that link carbon concentration with average surface temperature and measures of economic welfare. Implementation costs are then derived by modeling national and global economic performance. Multiplayer, normal form games with payoffs derived by netting costs from shared benefits are then constructed, revealing that the US economy is a net gainer in net present value terms from unilateral implementation. The comparative net benefits to Europe and China are negative but small, making their choice sensitive to the discount rate. The dominant strategy for all other countries is to free ride. Taking the three large economies as a group, there are net gains from implementing carbon taxes, which would be bolstered by universal adoption. Yet compensatory side payments that would induce universal adoption are still not affordable. Moreover, the net gains to all regions do not begin to appear for at least two decades, rendering commitment to abatement politically difficult.