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Measures to enhance the success of global climate treaties

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Abstract

We analyze important forces that hamper the formation of successful self-enforcing agreements to mitigate global warming from an economic point of view. The analysis combines two modules: (a) an integrated assessment model that captures the feedback between the economy, environmental damages and the climate system and (b) a game theoretic model that determines stable coalitions in the presence of free-riding incentives. We consider two types of measures to enhance the success of international environmental treaty-making: (a) transfers, aiming at balancing asymmetric gains from cooperation; (b) institutional changes, aiming at making it more difficult to upset stability of a treaty. We find that institutional changes may be as important as transfers and should therefore receive more attention in future international negotiations.

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Notes

  1. A notable exception is for instance Bosello, Buchner, and Carraro (2003).

  2. An overview of the equations and parameters of the model is provided in the Appendix. A more detailed exposition of the model can be found in Eyckmans and Tulkens (2003).

  3. We choose a sufficiently long time period to avoid “end point bias”. However, due to discounting, only a shorter period is strategically relevant for players.

  4. The mirror image is: abatement constitutes a positive externality. See Subsect. 3.2.

  5. This assumption is widely made in coalition theory. See Bloch (1997) and Yi (1997).

  6. That is, the calibration of our model implies that there are leakage effects but they are relatively small. In other words, the slope of the reaction function of regions is negative but the absolute value is less than one. This is in line with the assumptions of most theoretical models. See Finus (2003).

  7. The concept of internal & external stability that we apply is due to d’ Aspremont et al. (1983). It is de facto a Nash equilibrium where no player has an incentive to revise his decision about membership. For an overview of other concepts applied in the environmental context, see Finus (2003). Note that the fundamental difference to the γ-core applied in Eyckmans and Tulkens (2003) is related to internal stability. Internal stability implies that if a member of coalition S left, the remaining coalition members \({\hbox{S}\backslash \{\hbox{i}\}}\) would stick together whereas the γ-core assumes that \({\hbox{S}\backslash \{\hbox{i}\}}\) would break apart. Given the fact that coalition formation exhibits a positive externality on outsiders (due to increased abatement efforts by the coalition), the implicit punishment after a member of S leaves this coalition is stronger for the γ-core than for internal stability. This explains why in the presence of free-rider incentives the grand coalition is usually not internally stable though it lies in the core. See Tulkens (1998) and Finus and Rundshagen (2006) for details.

  8. This procedure is valid because we assume a lump sum transfer of discounted payoffs for simplicity. That is, transfers have no effect on equilibrium economic strategy vectors in our framework, i.e., the game is a transferable utility game (TU-game) as assumed almost throughout the literature on coalition formation. A formal proof can be found in Eyckmans and Tulkens (2003).

  9. “Total transfers” in the last column of Table 3 are the sum of all positive transfers (=sum of all negative transfers) but not the sum of all transfers that are zero by definition. Total transfers are an indicator of the amount of financial resources redistributed by the transfer scheme. It is important to note that because transfers are computed according to (5) it can happen that total transfers exceed the total gain from cooperation. For instance, suppose \({\hbox{W}_{\rm i} (\hbox{c}^{\rm N})-\hbox{W}_{\rm i} \left( \hbox{c} \right) > 0}\) and λi = 1, then \({\hbox{t}_{\rm i} (\hbox{c}) > \sum\nolimits_{{\rm i}\in {\rm S}} {\left[ {\hbox{W}_{\rm i}\left( \hbox{c} \right)-\hbox{W}_{\rm i}(\hbox{c}^{\rm N})} \right]} }\).

  10. The γ-core also assumes a best reply after player I has left coalition S but \({\hbox{S}\backslash \{\hbox{i}\}}\) breaks apart implying lower abatement by these players and hence harsher punishment. See endnote 7.

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Acknowledgement

This paper has been written while M. Finus was a visiting scholar at the Katholieke Universiteit Leuven, Centrum voor Economische Studiën (Leuven, Belgium) and at Fondazione Eni Enrico Mattei, FEEM (Venice, Italy). He acknowledges the financial support by the CLIMNEG 2 project funded by the Belgian Federal Science Policy Office and the kind hospitality of FEEM. Both authors acknowledge research assistance by Carmen Dunsche.

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Authors and Affiliations

  1. EHSAL, Europese Hogeschool Brussel, Stormstraat 2, 1000, Brussels, Belgium

    Johan Eyckmans

  2. Centrum voor Economische Studiën, K.U. Leuven, Leuven, Belgium

    Johan Eyckmans

  3. Department of Economics, University of Hagen, Profilstr. 8, 58084, Hagen, Germany

    Michael Finus

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  1. Johan Eyckmans
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  2. Michael Finus
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Correspondence to Michael Finus.

Appendix

Appendix

The CLIMNEG World Simulation Model comprises the following equations:

$$ \begin{aligned} \hbox{Y}_{\rm i,t} &=\hbox{Z}_{\rm i,t} +\hbox{I}_{\rm i,t} +\hbox{Y}_{\rm i,t} \hbox{C}_{\rm i} (\mu_{\rm i,t} )+\hbox{Y}_{\rm i,t} \hbox{D}_{\rm i} (\Delta \hbox{T}_{\rm t} )\\ \hbox{Y}_{\rm i,t} &=\hbox{a}_{\rm i,t} \hbox{K}_{\rm i,t}^\gamma \hbox{L}_{\rm i,t}^{1-\gamma }\\ \hbox{C}_{\rm i}(\mu_{\rm i,t} )&=\hbox{b}_{\rm i,1} \mu_{\rm i,t}^{{\rm b}_{\rm i,2} }\\ \hbox{D}_{\rm i} (\Delta \hbox{T}_{\rm t} )&=\theta _{\rm i,1} \Delta \hbox{T}_{\rm t}^{\theta _{\rm i,2}}\\ \hbox{K}_{\rm i,t+1} &=\left[ {1-\delta _{\rm K} } \right]\hbox{K}_{\rm i,t} +\hbox{I}_{\rm i,t} \quad\quad\;\;\;\hbox{K}_{\rm i,0}\;\;\hbox{given}\\ \hbox{E}_{\rm i,t}&=\alpha_{\rm i,t}\left[{1-\mu_{\rm i,t} } \right]\hbox{Y}_{\rm i,t}\\ \hbox{M}_{\rm t+1} &=\left[ {1-\delta _{\rm M}} \right]\hbox{M}_{\rm t} +\beta \sum\limits_{{\rm i}\in {\rm N}}{\hbox{E}_{\rm i,t} \quad\hbox{M}_{0}\,\;\hbox{given}}\\ \hbox{F}_{\rm t} &=\frac{4.1\,\ln(\hbox{M}_{\rm t})}{\ln (2)}+\hbox{F}_{\rm t}^{\rm x}\\ \hbox{T}_{\rm t}^0 &=\hbox{T}_{\rm t-1}^0 +\tau _3 \left[ {\hbox{T}_{\rm t-1}^{\rm a} -\hbox{T}_{\rm t-1}^0 } \right]\\ \hbox{T}_{\rm t}^{\rm a} &=\hbox{T}_{\rm t-1}^{\rm a}+\tau_1 \left[ {\hbox{F}_{\rm t}-\lambda \hbox{T}_{\rm t-1}^{\rm a} } \right]-\tau _2 \left[ {\hbox{T}_{\rm t-1}^{\rm a} -\hbox{T}_{\rm t-1}^0 }\right]\\ \Delta\hbox{T}_{\rm t}&=\frac{\hbox{T}_{\rm t}^{\rm a}}{2.50}\\ \end{aligned} $$
Table 4 List of variables
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Table 5 Global parameter values
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Table 6 Regional parameter values
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Table 7 Variables in 1990 (reference year)a
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Eyckmans, J., Finus, M. Measures to enhance the success of global climate treaties. Int Environ Agreements 7, 73–97 (2007). https://doi.org/10.1007/s10784-006-9030-2

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