Climate change in a public goods game: Investment decision in mitigation versus adaptation

Abstract

We use behavioral and experimental economics to study a particular aspect of the economics of climate change: the potential trade-off between countries' investments in mitigation versus adaptation. While mitigation of greenhouse gases can be viewed as a public good, adaptation to climate change is a private good, benefiting only the country or the individual that invests in adaptation. We use a one-shot public-goods game that deviates from the standard public-goods game by introducing a stochastic term to account for probabilistic destruction in a climate-change setting, where the probability density function is mapped to within-group levels of mitigation. We compare low-vulnerability and high-vulnerability treatments by varying the magnitude of disaster across treatments. Our results show that there is no significant difference in the level of mitigation across these treatments. Further, our results emphasize the role of trust in enhancing cooperation.

Introduction

Since climate change entered the international policy arena two decades ago, the primary focus has been on mitigation, with the United Nations Framework Convention on Climate Change and all subsequent documents repeatedly calling on countries to cooperate in reducing greenhouse gas emissions. This widespread focus on mitigation has been criticised by some for failing to integrate adaptation sufficiently into policy (Burton et al., 2007). More recently however, the role of adaptation in addressing climate change has been given more attention. This is partly because of the cumulative effect of past emissions, such that there is a certain amount of climatic change to which we are committed, and partly because the global conventions are not bringing about the necessary degree of mitigation. Thus it is now recognized that both mitigation and adaptation are essential strategies in addressing climate change effectively.

Dealing with climate change presents nations with a social dilemma on an unprecedented scale. The stabilization of Earth's atmosphere is a prime example of a global public good, where each country (and individual) faces private costs to reduce greenhouse gas emissions, while the benefits of such efforts are shared by all regardless of their own contributions. Hence, what is rational on individual and by extension, national levels is not globally optimal. This is the ‘tragedy of the commons’ as described by Hardin (1968) magnified to global proportions.

In this paper, we use behavioral and experimental economics to study a particular aspect of the economics of climate change: the potential trade-off between countries' investments in mitigation versus adaptation. Mitigation of greenhouse gases can be viewed as a global public good, while an investment in adaptation is best described as a private good, benefiting only the country or the individual that invests in adaptation. We use a one-shot public-goods game framework and add, in our view, two fundamental differences, compared to an “ordinary” public goods game.¹ First, we explicitly use a climate change framing and unlike Milinski et al., 2008, Milinski et al., 2006, (discussed below), we express our model in terms of a loss environment. This reflects an important dynamic of climate change: that the public good does not generate a potential gain; rather, subjects can only experience a loss. The size of that loss is determined by the type of investments made in addressing climate change and this illustrates the finding that most countries are likely to experience a loss of wealth due to climate change (UNFCCC, 2007). Second, the science of climate change is highly uncertain and there is a risk that even if countries mitigate there could still be a negative impact of climate change. We model this uncertainty by including a stochastic risk element in the public goods game. Our analysis in this paper of the mitigation–adaptation trade-off contributes to the understanding why the collective action problem of climate change is so difficult to overcome. Although climate-change analysis is a growing area of economic research, only a few studies have been conducted in the sub-discipline of experimental and behavioral economics.² However, many studies in the general experimental and behavioral economics literature offer insights into the collective action problem with implications for climate change (Brekke and Johansson-Stenman, 2008). For example the effect of conditional cooperation (Gächter, 2007, Fischbacher et al., 2001), reciprocity (Falk and Fischbacher, 2006), trust (Gächter et al., 2004) and the role of punishment of non cooperators (Fehr and Gächter, 2000) help explaining the positive rates of cooperation observed in both field and laboratory experiments.

Our model resembles the design used by Walker and Gardner (1992) in modeling an environment characterized by probabilistic destruction. They investigate the consumption of a common pool resource where any level of consumption increases the likelihood of destruction. They also ran a treatment with a safe zone, a threshold where low levels of consumption did not threaten the resource, and in this circumstance they found limited evidence of constrained consumption but in general the resource tended towards destruction in both treatments. Miliniski et al. (2008) also included a threshold in their collective risk climate change experiment where the threshold represents the point at which dangerous climate change will occur. Their results show that the majority of groups were not able to reach the target and only in the situation where there was a high risk (a 90% chance) of losing one's private wealth did some groups succeed in achieving the necessary level of contributions. Differently from the above mentioned studies, we do not include a safe zone in our model-firstly because of the inherent environmental uncertainty related to the effects of climate change, and secondly because there is substantial evidence that many of Earth's natural systems have already been affected by climate change (UNFCCC, 2007).

A paper that relates closely to our area of study is Milinski et al. (2008) where the authors run several public good experiments with a climate change framing and find high rates of cooperation, between 40% and 94% depending on the treatment (ibid: 3995), although in their design the common pool was not divided amongst the participants but was rather to be donated to a public climate change fund.

A valid question at this point is whether or not a trade-off really exists between adaptation and mitigation investments. Tol (2005) discusses this issue in depth and highlights the complexity of comparing these two forms of investment when they differ on a variety of scales. Furthermore the interrelationship between mitigation and adaptation is multifaceted with a range of positive and negative feedback systems (De Bruin et al., 2009, Tol, 2005). The term ‘mitigation’ in the climate change vernacular refers specifically to approaches that reduce the concentration of greenhouse gases in the atmosphere.³ Quantifying the effectiveness of mitigation schemes is relatively straightforward as there is a comparable unit of measurement: carbon dioxide equivalent (CO₂e). In contrast to mitigation, adaptation is complex to define and measure, and the literature recognizes different types of adaptation: anticipatory, reactive, planned and autonomous (Tol, 2005). In essence adaptation denotes any action taken to reduce the vulnerability of a human or natural system from the negative effects of climate change. There is no uniform way to measure an investment in adaptation, nor is it clear how to quantify a return to that investment that is comparable across schemes since a suitable adaptation strategy is specific to a particular economy and ecosystem. Furthermore, while some climate change impacts can be compensated for by means of adaptation, many impacts are too drastic to surmount. Thus the effectiveness of an adaptation strategy is limited and further impeded by scientific uncertainty regarding the likely effect of climate change on local weather patterns. On the other hand some adaptation investments can be beneficial to the economy independent of climate change; as Tol (2005:574) notes, ‘a society that can adapt to climate change is probably also better in adaptation to socio-economic change’.

While adaptation and mitigation are still treated as distinctly different mandates by most national governments, we believe that, as climate disasters become more frequent, countries will increasingly have to make hard choices in allocating scarce resources and thus the trade-off between mitigation and adaptation presents itself. ⁴ In our experiment we depict the trade-off as a discrete choice framework where participants have the option to either mitigate or adapt. Furthermore, participants in the experiment did not have the option of ‘doing nothing’. While a strategy of doing nothing could be justified for a number of reasons (as discussed in the experiment section), and motivated by e.g. disbelief in the science, apathy, a high discount rate or free-riding sentiments, it does however have the notable short-fall of abstracting from the reality of the complex trade-offs that must be made in the real-world policy context (see for instance Fankhauser et al., 1999) and the fact that optimal strategies for dealing with climate change may require joint implementation of adaptation and mitigation strategies (Perrings, 2005). In addition, as Pinto and Harrison (2003) illustrates, countries may have different political preference functions that may impact on multilateral negotiations, which will in turn influence the amount of funds individual countries allocate to mitigation.

The question of whether or not we can carry over results from individuals to the country level is, of course, readily contestable. It is for example not clear from existing research whether countries would be more or less cooperative than individuals (see the discussion in Brekke and Johansson-Stenman, 2008:289–290). While recognizing that the external validity of lab experiments is limited in many ways (as discussed extensively by Levitt and List, 2007), we believe that the behavior of individuals revealed in the lab context can be used as a basis for understanding and analyzing key factors that underlie decision making on mitigation and adaptation on the country level (for a further discussion see footnote 19). A few public goods experiments have been conducted in South Africa and they generally reveal lower rates of contribution than the international average. Typical international results show contribution levels between 40%–60% in a one-shot game or in the first round of a finitely repeated game. (Dawes and Thaler, 1988, Ostrom, 2000; `Sturm and Weimann, 2003, Zelmer, 2003). Within South Africa, a public goods experiment carried out with rural fishing communities by Visser and Burns (2007) reported an average level of contribution of 46.7% in the first round of the treatment and in the final round of a six-stage treatment, this level declined to 40%. Lower levels of contribution were observed in an experiment conducted with urban high-school students, with an average contribution rate of 33.7% (Kocher et al., 2008). Kocher et al. (2008) also tested for an effect of stake size on behavior and concluded that it had no significant effect on contribution levels (ibid.). Another study with urban high-school students lent further support to the above result, showing contributions to the public good averaging 33% throughout the game (Hofmeyr et al., 2007).

We relate contribution behavior to the subjects' socio-economic background, as well as to their attitude towards trust in other people and their beliefs about the contribution level of others. Furthermore, like Miliniski et al. (2008) we analyze the effect of vulnerability on contribution levels. Vulnerability defines how severely a region will be impacted by climate change and is used to indicate different scientific projections regarding the degree of severity of climate change.⁵ In the paper by Milinski et al. (2008) vulnerability was studied by varying the risk of experiencing a climate change disaster from 10% to 90%. As mentioned above, only in the high-vulnerability treatment did some groups (5 out of 10) manage to achieve the target threshold (ibid: 2292).

Many experiments have been conducted to try to better understand the dynamics of collective action, but none to our knowledge have investigated the trade-off between mitigation and adaptation in the climate change context. This research contributes both to the public good literature and to the analysis of climate change policy.