Managing the Global Commons

1
Managing the Global Commons

• Urs Luterbacher
• Graduate institute of International Studies

2
What are commons?

• Commons are an ambiguous notion
• They can mean resources belonging to
• No one and thus to whoever has access to them
• To several owners. There may or may not be
  complex ownership and use rules
• The term takes its origins from land in medieval
  communities that was open to most people in them
• It also applies now to international spaces and
  resources

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Why study commons?

• One can show that in the long run open access
  type commons lead to overuse
• The tragedy of the commons! Many aspects
• They lead to un-sustainability Ownership problem
  and market failure
• This is true for local as well as global commons
• How can this problem be tackled analytically?
  Does it take several forms? What does it lead
  to?
• What are the solutions? Are these different
  locally, regionally and globally? What are the
  instruments to be used?
• Global commons raise specific problems

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Environment, economy, polity

• One often hears that the environment, the
  economy, the political system obey fundamentally
  different logics
• Is this correct?
• Intuition tells us after some thinking that this
  is not the case There is no economy without
  ecology, no political system without an economic
  system
• Moreover, the economic system and the political
  system feedback on the environment Early
  agricultural kingdoms of the Mid-East, system
  collapses, conflict about resources

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Private goods, externalities, and public goods

• Clearly an analytical framework is needed to
  study the relationships between these 3 aspects
  and to put them under a common (no pun intended)
  roof
• For convenience sake we will use the framework
  used originally by economists but the taken over
  by political scientists and resource analysts
  Different kinds of goods
• Private goods While my preferences or well-being
  depends on what I purchase, it does not depend on
  what others purchase
• Public goods When I purchase units of it I can
  not keep others from consume it as well (non
  excludability)
• Public goods lead then to externalities good or
  bad!!

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Collective goods and institutions

• Collective (public) goods are then up to a point
  non exclusive and some of them are non-rival
• They can lead to peculiar behavior such as free
  riding and the exploitation of the strong by the
  weak
• Some collective goods are semi exclusive and
  called club goods, some are rival and called
  commons (negative externalities)
• Commons often are related to fugitive goods
• All public goods require institutional settings
  in the form of coalitions
• These modify incentives and behavior

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Illustration the triadic coalition model

• This is revealed in Caplows coalition game in
  the triad A, B, C but AgtBgtC, with AltBC
• Table of gains
• The weak free rides on the strong
• Notice the additivity assumption

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The Tragedy of the Commons and its Solutions

• The tragedy notion is due to the work of Hardin
  (1968)
• It represents an open access field situation in
  which every participant has an incentive to put
  more and more animals for grazing
• The Hardin common represents individual gains but
  shared common losses as the field gets to be
  totally overgrazed
• Under the circumstances, the grass is a fugitive
  resource that everybody has an incentive to grab
  before the other!

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The Tragedy A rigorous analysis

• Hardins analysis is verbal and kind of loose
• He does not consider the costs associated with
  herding itself
• His strategic analysis is vague and has led to a
  lot of confusion in the literature
• His analysis of solutions to the problem he is
  investigating is limited and imprecise
• He only evokes property rights solutions
• Nevertheless, his general conclusions are correct
  if commons are associated with open access

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Commons A correct representation
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Strategic aspects

• Strategic aspects of the common will depend on
  what agents anticipate about each other
• Do they have means of retaliating for damage? Not
  in open access common
• Their behavior is conditioned by others and the
  importance of moving first

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Game theoretical representationsPris. Dilemma
Chicken
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Instruments of solution
Taxation
Market for externalities solution
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Property rights solutions

• Advantages stressed by Coase
• Externalities can be bargained away
• Not always possible because of information
  problems
• Property rights may emerge spontaneously
  (Demsetz)
• Problem Monitoring and transaction costs

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Theory of slowly renewable resources

• Slowly renewable resources have to be evaluated
  as an evolving stock such as a population minus
  withdrawals

Evolution of z Natural Dynamics of z minus
catches
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Implication for dynamics
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Slowly renewable resources Production

• Producers will be drawn into using the stock by
  profits

Evolution of inputs x, if average profits are
positive, if F is production, q unit price, p
unit costs
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Equilibrium conditions

• In equilibrium there should be an optimal level
  of the resource z if

Is maximized subject to the relation (1) before
and where r is a discount rate The discounted
sum of all future profits is maximized with a
discount rate r, the spot price of the resource
is thus dependent on availability of z in nature
and the discount rate
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Optimal policies

• To keep a renewable resource from getting
  exhausted 2 conditions have to be met
• A spot fee corresponding to the spot price has to
  be charged to correspond to the scarcity rent
• A license fee per producer unit These 2
  conditions are naturally fulfilled with property
  rights

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Exhaustible Resources

• No resource is truly renewable like no resource
  is truly exhaustible
• The whole question is a question of timing
• Resources that renew themselves very slowly
  (hundreds or thousands of years) are considered
  exhaustible
• Engineers and economists were very concerned with
  this question in the beginning of the last
  century
• This led to the question How to deal optimally
  with such resources?

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How to conceptualize exhaustible resources?

• The answer was given in the late 1920s and early
  1930s by Harold Hotelling the Hotelling
  principle
• An exhaustible resource is an asset and its net
  price (market price - extraction costs) should
  increase exponentially with the interest (or
  discount rate, to some extent a socio-political
  construct), i.e.
• P(t) P(0)ert or (dP/dt)/P r

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Optimal depletion

• If for the resource Z, the price is P. Total
  value of resource PZ.
• Compare to other assets, P has to grow as P(0)ert
  to stay competitive
• Competitive resource owners will deplete at a
  socially optimal rate
• Take r the rate if return to the owner of natural
  resources. In equilibrium r r
• Whenever, r r, we have a conservationists
  dilemma.

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Conditions for the optimal working of Hotelling
principle

• 1. No externalities
• 2. No uncertainty about future sales, exploration
  prospects, etc.
• 3. No extraction with environmental externalities
  (ex. Gold Rush).
• 4. Not too big differences between private and
  market (social) discount rate (for instance due
  to dangers of transfer within society)

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Example Deforestation processes

• According to Hotelling principles a forested area
  is a particular type of asset whose capitalized
  value should grow with the interest rate. If this
  growth is not achieved other assets including
  agricultural ones will be closer and the forested
  land will either sold for development or
  transformed into another agricultural asset.
• In particular If the income flow stemming from
  the forest is lower than the income flow from
  other activities then deforestation will occur!

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This can be due to

• subsidies for agricultural production
• income subsidies or welfare
• cost of property rights enforcement
• prohibition of trade
• unclearly defined property rights

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Graphical analysis
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Other incentive models The Owen land use model

• The land use model developed by Owen assumes only
  two types of land use, agriculture and dwelling
  and examines the special case of areas around
  urban centers
• Whether land will be transformed into dwelling
  will depend on income streams generated by both
• Arrival of newcomers increases income streams
  from dwellings especially if migrants get
  subsidies

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Conclusions of Owen model and further development

• Even under normal conditions, as long as there is
  an attraction to moving into an urban area such
  as a subsidy or the hope of a job, farm land will
  be urbanized down to a critical value which can
  be very close to zero.
• Higher interest rate for agricultural investments
  as opposed to investments for urban dwellings
  will accelerate the process.

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Further conclusions

• Mass migration which can result from climate
  change will accelerate this process.
• Foreign aid and relief can accelerate the process
• An Ill-defined property right regime will
  initially slow but then accelerate the process.
• Climate change might reduce net profits made from
  agricultural production and accelerate the
  process.

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Estimating costs and the scarcity rent

• As revealed by the Stern review (2006), discount
  rates constitute an important parameter in
  estimating climate change costs and the issue of
  acting now vs acting later
• Low discount rates will increase the cost
  estimates of climate change almost irrespectively
  of the seriousness of climate change (cf.
  formula)

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Ethics and costs

• The discount rate debate is an ethical one How
  to value the present generation vs future ones
  the closer to 0 the more future generations are
  valued
• There is also a trade off in the present vs
  future better things across space instead of
  time measured by another parameter which Dasgupta
  calls ? and which is taken as 1 by the Stern
  review
• According to Dasgupta ? should be greater than 1
  (attention paid to inequality)

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The Cooperation Problem

• Cooperation in a decentralized system presents
  difficulties
• Some forms of cooperation are more difficult to
  achieve than others
• This is the case for environmental cooperation
• Illustration with extended PD and Chicken

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The Cooperation problem in Perspective
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Cooperation is a different problem for trade and
the environment

• Trade Multiplayer PD with retaliation
  possibilities
• Environment No credible retaliation
• Strategic problem, finding ways to exclude
  cheaters or to induce non participants to come
  in Greif paper
• Almost natural in trade
• Much more difficult in environment shunning or
  invention of exclusionary mechanisms

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The Problem at the Level of International
Environmental Agreements

• General monitoring of activities
• Montreal Exclusion via trade prohibitions
• Kyoto
• Exclusion via prohibition of advantages CDM
• Compliance mechanism against cheaters
• The cooperation problem is further complicated by
  domestic issues
• Trade Trade losers
• Environment Environmental losers

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Cooperation at the regional level

• Cooperation at the regional level can often take
  the form of common endeavors leading to common
  property
• There are clear advantages to common property
  risk sharing. The example of pools of water under
  properties defined at the surface is relevant.
  For each individual owner of the surface
  properties, digging a well might not be worth it
  because of the risks associated with the prospect
  of not finding any water under a particular
  property
• Risk sharing in a common property arrangement
  tremendously increases the possibility of
  deriving benefits from digging wells in a
  coordinated fashion. In fact, the greater the
  number of participants in the risk sharing
  operation, the lower the costs associated with
  the enterprise and thus the higher the benefits
  for each individual owner Insurance
• Even risk- averse individual owners have an
  incentive to enter such an insurance scheme,
  which renders the costs of risk bearing negative

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However preexisting property arrangements might
make this difficult
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Example Water Asymmetries

• Standard solutions often dont work
• They can add to the problem if for instance
  property rights have initially been distributed
  in a way that leads to inefficiencies
• They will then often lead to conflict and
  credibility problems

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Credibility Issues Perfect and imperfect
Information

• Paradoxically in a sequential bargaining process
  the lack of knowledge of the opponents real
  intentions can lead to prudence and keep the
  other side prudent as well (risk averse)
• It can thus lead to the emergence of equilibria
  which can lead to cooperative outcomes
• It is best if such outcomes are backed by
  international institutional settings

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Central Asia has Good Water Resources from
Mountains and Glaciers

• Example Kyrgyzstan Petrov Glacier, Ak-Shyrak
  Range

Alt 3800 m
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Water Use leads here to major inefficiencies

• Water is wasted for cotton production in areas
  otherwise not suited for this culture
• It is provided for free most often so no
  incentive to preserve it
• 32,000 km of Canals, poorly maintained and full
  of leaks
• Karakoum canal 1,340 km open air in the
  Turkmenistan Desert

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These lead to transboundary conflicts on
allocations

• Countries are constrained by a water quota system
  dating back to the Soviet Era
• The Almaty Agreement (1992)
• Some extensions and revisions in different years
  especially in (1998 exact amount of energy to be
  exported)
• Under the system Kyrgyzstan gets only 10 of the
  waters of the Syr Daria basin
• This prohibits the use of major developments in
  power generation
• Any attempts to retain more water has lead to
  retaliations by down-stream countries
• Interruption of fossil fuel deliveries

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Conflict is the most inefficient form of
environmental management Can we do better?

• Project an attempt at proposing solutions
• Such solutions have to enhance efficiency
• All regions have to profit

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Potential of Kyrgyzstan

• Kyrgyzstan generates an annual total flow of
  about 51 km3
• This flow could increase by 10 under projected
  climate change through precipitations and glacier
  melt
• Hydropower could extend to 150 billion kwh if
  potential fully used

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Basic Economic TrendsValue AddedValue added is
the net output of a sector after adding up all
outputs and subtracting intermediate inputs. It
is calculated without making deductions for
depreciation of fabricated assets or depletion
and degradation of natural resources. Value
Added in Industry (Source World Bank)
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Solution to Conflict

• Is it possible to improve the welfare of the
  whole region Kyrgyzstan Kazakhstan Uzbekistan?
• Yes, by letting Kyrgyzstan use its full
  hydroelectric potential and export it cheaply to
  the region
• Kyrgyzstan with 150 billion kwh potential can
  produce more than enough for the region In 2000,
  entire production of Kyrgyzstan Kazakhstan
  Uzbekistan 106 billions
• Tadjikistan has almost the same potential, so 300
  billion kwh would be available !

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Kyrgyzstan can make use of high altitude dams

• They can advantageously replace fossil fuel
  facilities
• They can adapt instantaneously to demand and
  intervene in times where spot prices are high
• But are they advantageous for the whole region?
• Answer with the help of a numerical model

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Yes Expanded production can improve total value
added for the three countries!This solution
presents however the credibility problems
mentioned
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2 important international conventions at the
global environmental level

• The Vienna Convention of 1985 and the Montreal
  Protocol to it in 1987 (ratified 1989)
• The Rio convention 1992 and the Kyoto Protocol
  1997 (ratified 2005)

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Vienna and Montreal Protocol

• Following the discovery of the Antarctic ozone
  hole in late 1985, governments recognized the
  need for stronger measures to reduce the
  production and consumption of a number of CFCs
  (CFC 11, 12, 113, 114, and 115) and several
  Halons (1211, 1301, 2402). The Montreal Protocol
  on Substances that Deplete the Ozone Layer was
  adopted on 16 September 1987
• These substances are essentially banned and trade
  in them is also banned, including trade in goods
  mad with such substances
• Developing countries are helped via a
  Multilateral Fund and a Global Environmental
  Facility Fund

52
Montreal characteristics

• Essentially a command and control approach
• Possible because of focus on a very specific
  problem
• The solution is essentially low cost since
  substitutes exist

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Rio, Kyoto and Climate change
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The Climate Regime The UNFCCC and Kyoto

• The UNFCCC elaborated in Rio in 1992
• Only one obligation to report national
  greenhouse gas emissions
• Mostly recommendations stabilize greenhouse gas
  concentrations at their 1990 levels for
  industrialized countries
• Berlin 1995
• Initial effort in greenhouse gas mitigation had
  to be done by industrialized countries
• Geneva 1996
• US Undersecretary of State Timothy Wirth
  expresses support for binding reduction targets
  in exchange for emission trading The road to
  Kyoto 3rd meeting of UNFCCC parties in 1997 is
  open

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The Kyoto Protocol (1997)

• 5.2 reduction of emission levels below 1990
  levels by 2008-2012 for all industrialized
  countries
• Specific targets for various countries US -7,
  EU -8, Japan -6, Switzerland -8, but
  Australia 8, Norway 1, Iceland 10!
• 6 greenhouse gases are considered CO2, CH4
  (methane), N2 O (nitrous oxide), HFC
  (hexafluorocarbon), PFC (perfluocarbon), SF6
  (sulphur hexafluoride)
• Kyoto became effective with the Russian
  ratification at the end of 2004, the US and
  Australia refused ratification
• It got officially underway on Feb. 16, 2005

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The Kyoto Flexible Mechanisms

• Emission reductions can be achieved in a variety
  of ways, country specific and/or with the
  enhancement of carbon sinks or through the use of
  the so-called Kyoto flexible mechanisms which
  are
• Emissions trading between industrialized
  countries The EU commission has started the
  process within Europe
• Joint implementation between industrialized
  countries
• The clean development mechanism between
  industrialized and developing countries Some
  promising first steps

57
Kyoto is only defined until 2012, The US refusal
has instituted a dual negotiation regime

• Negotiations continue under the general UNFCCC
  regime (with the US) within the Conference Of the
  Parties framework
• Separate negotiations are carried out within the
  Members Of the Kyoto Protocol group
• These two groups started their work at COP 11 and
  MOP 1 in Montreal Nov. 28-Dec. 9

58
The EU acts as a leader in Kyoto, It has taken a
Bubble Approach
59
Formally the Kyoto Protocol is working

• Targets not reached for EU 15 but EU 27
• Russian and Ukrainian Hot Air insure that its
  goals are reached

60
Two kinds of instruments were originally envisaged

• Taxes (carbon taxes)
• Tradable permits also called cap and trade
  systems
• Both systems have advantages and disadvantages

61
Tax advantages and disadvantages

• Taxes are fixed once and can be adjusted in a
  controlled way
• They are simple to levy
• They however do not target a quantity
• So far the experience is not that they harmonize
  prices!
• They rather tend to create distortions between
  countries as to what is taxed and who taxes
• They can have counter productive effects
  (Chichilnisky paper)

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Permit advantages and disadvantages

• They target quantities
• They can be exchanged down to the individual
  level
• They provide the individual with part of the
  scarcity rent thus creating incentives
• They lead however to volatile prices
• They demand a relatively complex monitoring system

63
Attempts have been made to simulate climate
society interactions at the global level

• Nordhaus proposed the DICE model in 1993
• It is an aggregated economic world model which
  estimates the impact the economy has on climate
  and climatic feedbacks in terms of damages to the
  economy
• A more disaggregated model called RICE was
  proposed in 1996.
• It incorporates 6 world regions interacting with
  each other US, E,U Japan, Former Soviet Union,
  China, Rest of the World One can then compute
  coaltion outcomes

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Conclusions from the Nordhaus models

• The DICE model suggests modest reductions now and
  much more in the future
• It insists on the importance of full
  participation and the fact that non participation
  increases costs
• It suggests a look at geo-engineering approaches
• RICE indicates that the US would not benefit from
  a cooperative approach while most other regions
  would

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Eyckmans and Tulkens modify the Nordhaus model
RICE

• They show that a slightly different formulation
  and different assumptions about discount rates
  modify the RICE results
• In their formulation, the US would have an
  incentive to cooperate, China less
• This might be due to them using regionally
  differentiated discount rates

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Variables in the Rice and Eyckmans Tulkens Model
67
General structure of the Nordhaus Yang and
Eyckmans Tulkens model
68
Eyckmans Tulkens results
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Trade the big unknown

• Trade and the application of the Kyoto protocol
  Could there be problems?
• 2 possible areas of contention CDMs and Green
  protectionism in the form of border tax
  adjustments
• The trade effects of models poorly understood
• On the one hand accelerate the movement toward
  uniformization of standards
• On the other, undermine the reduction process
  through loopholes
• Much remains to be analyzed!

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Syllabus

• Requirements
• Take Home Based on the literature for April 23
  write a short essay (5 pages max) on what
  sustainability means in its relationship to
  commons and to international and global issues.
• Test on the whole course.
• March 12 General Introduction to Course
  Substance, Organization, Requirements
• March 19 Substantive Introduction Collective
  Goods and their different characteristics
• Sandler Todd and Daniel G. Arce (2002) Pure
  Public Goods versus Commons Research Paper, USC
• Taylor Michael (1987) The Possibility of
  Cooperation Cambridge, UK Cambridge University
  Press, Chapt. 1(Introduction)

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Syllabus continued

• March 26 The Problem of the Commons Statics,
  Corrective Instruments, Property Rights
• Hardin, Garret, (1968) The Tragedy of the
  Commons, Science, 1621243-48.
• Coase, Ronald (1960) The Problem of Social Cost
  The Journal of Law and Economics, 31-44.
• Demsetz Harold (1967) Towards a Theory of
  Property Rights The American Economic Review,
  57,2 347-359.
• Dasgupta, P.S. and G. M. Heal (1979) Economic
  Theory and Exhaustible Resources. The Cambridge
  economic Handbooks, Cambridge Cambridge
  University Press. Chapters 1, 2 (11-21), and 3.

72

• April 2 The Problem of the Commons Dynamics,
  Renewable Resources, Instruments
• Dasgupta, P.S. and G. M. Heal (1979) Economic
  Theory and Exhaustible Resources. The Cambridge
  economic Handbooks, Cambridge Cambridge
  University Press. Chapter 5.
• (Easter vacation, from April 6 to April 15, 2007)
• April 16 Exhaustible Resources, Land Use Issues
• Dasgupta, P.S. and G. M. Heal (1979) Economic
  Theory and Exhaustible Resources. The Cambridge
  economic Handbooks, Cambridge Cambridge
  University Press. Chapter 6.
• Luterbacher, Urs (2004) Migration Patterns,
  Land Use and Climate Change in Unruh, Jon D.
  Maarten S. Krol and Nurit Kliot Environmental
  Change and its Implications for Population
  Migration Dordrecht Kluwer 165-175.
• April 23 The Conservationist Dilemma,
  Sustainability Issues and the Future
• Y. Hossein Farzin (1984) The Effect of the
  Discount Rate on Depletion of Exhaustible
  Resources The Journal of Political Economy, 92,
  5 841-851.
• Stern, Nicolas (2006) The case for action to
  reduce the risks of climate change
• Stern Nicolas (2006) Value judgments, welfare
  weights and discounting issues and evidence
• Stern Nicolas (2006) Building an effective
  international response to climate
• Change
• Dasgupta, Partha (2006) Comments on the Stern
  Review's Economics of Climate Change
• Nordhaus, William (2006) The Stern Review on the
  Economics of Climate Change

73

• April 30 The International Situation and
  International Cooperation Questions
• Greif, Avner (1993) Contract Enforceability and
  Economic Institutions in Early Trade The
  Maghribi Traders Coalition, The American
  Economic Review, 83, 3, 525-548.
• Barrett, Scott (1998) A Theory of International
  Co-operation, Working Paper, Johns Hopkins
  University School of Avanced International
  Studies.
• Luterbacher, Urs(1994) International Cooperation
  The Problem of the Commons and the Special Case
  of the Antarctic Region, Synthese 100 413-440.
• May 7 Regional Cooperation Problems and
  Solutions
• Luterbacher, Urs, Valerii Kuzmichenok, Gulnara
  Shalpykova and Ellen Wiegandt Glaciers and
  Efficient Water Use in Central Asia in Orlove
  Benjamin, Ellen Wiegandt and Brian Luckman,
  Darkening Peaks, Berkeley, Universitiy of
  California Press, forthcoming.
• Luterbacher, Urs and Dushan Mamatkhanov Water
  and Mountains, Upstream and Downstream
  Relationships Analyzing Unequal Relations in
  Ellen Wiegandt edit. Mountains Sources of Water,
  Sources of Knowledge Amsterdam Springer-Kluwer,
  forthcoming.

74

• May 14 The Montreal and the Kyoto Protocol
• Benedick Richard The Improbable Montreal
  Protocol Science, Diplomacy and Defending the
  Ozone Layer
• Bodansky, Daniel (2001)l The History of the
  Global Climate Change Regime in Luterbacher Urs
  and Detlef Sprinz International Relations and
  Global Climate Change, Cambridge, MA MIT Press
  23-40
• Bodansky, Daniel (2001)l International Law and
  the Design of Climate Change in Luterbacher Urs
  and Detlef Sprinz International Relations and
  Global Climate Change, Cambridge, MA MIT Press
  201-220.
• Grubb, Michael (with Christian Vrolijk and Duncan
  Brack) (1999) The Kyoto Protocol A Guide and
  Assessment, London The Royal Insitute of
  International Affairs, Chapters 4 and 7.
• May 21 The Instrument Debate
• Chichilnisky, Graciela (1997) "North-South Trade
  and the Global Environment", American Economic
  Review 84 851-74.
• Chichilnisky, Graciela (1997) Development and
  Global Finance The Case for an International
  Bank of Environmental Settlements, UNDP
  Discussion Paper Series.
• Nordhaus William D. (2005) Life After Kyoto
  Alternative Approaches to Global Warming Policies
• May 28 Pentecost Monday

75

• June 4 Managing the International Environment
  The Future of the Major Accords
• Nordhaus William and Zilli Yang (1996) A
  Regional Dynamic General-Equilibrium Model of
  Alternative Climate-Change Strategies, American
  Economic Review 86, 741765.
• Eyckmans Jon and Henry Tulkens (2003) Simulating
  coalitionally stable burden sharing agreements
  for the climat change problem Resource and Energy
  Economics, In press.
• Luterbacher Urs and Carla Norrlöf (2001)The
  Organization of World Trade and the Climate
  Regime in Luterbacher Urs and Detlef Sprinz
  International Relations and Global Climate Change
  Cambridge, MA MIT Press 279-295.
• June 11 Test