Environmental Economics Public Economics Paper 8

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Environmental EconomicsPublic EconomicsPaper 8

• Lecture 7
• International Environmental Agreements

2
Motivation
Common property resources
Open access resources

• No government to enforce a management system.
• International environmental agreements are prone
  to free rider problems.
• The distribution of costs and benefits are often
  very asymmetric.

3
Outline
Repeated interaction

• Communal management as tacit cooperation.
• Communal management as explicit cooperation.
• International environmental agreements.
• Issue linking.
• Emission permits.

Limited repetition
4
A model

• N identical countries

• Discrete choice Abate (A) or pollute (P).

• The total benefit to a country if it is abating

of countries abating

• The total benefit to a country if it is
  polluting

5
The prisoners dilemma
Abate
Free riding
Pollute
Cooperative solution
A
P
A
2,6
5,5
Non-cooperative solution
P
6,2
3,3
6
Tacit cooperation

• Countries interact repeatedly over time and
  cooperation can arise as a norm which is
  sustained by a threat to punish misbehavior.
• If the countries value the future enough, then
  the gain from continued cooperation is larger
  than the immediate gain from deviation.

7
Payoff country 1
(2,6)
(5,5)
Payoff frontier
IR
(3,3)
(2,6)
Payoff country 1
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Problems

• Many equilibria gt pre-game coordination needed.
• Farsighted government?
• Monitoring misbehavior?
• Renegotiation proof?
• Symmetry gt is cooperation on the frontier?

Look at explicit cooperation and
international environmental agreements (IEAs)
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International Environmental Agreements (IEAs)

• About 130 IEAs.
• Most IEAs have incomplete participation.
• Most IEAs are not binding until a minimum has
  ratified.
• Very few IEAs have provisions for transfer
  payments between participating countries.

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Three questions

• Why do countries voluntarily sign IEAs?
• Do they comply to them?
• Are successful agreements likely to be a
  significant improvement over BaU (Business as
  Usual)?

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Three conditions for success

• Individual rationality
• all participants must be better off with than
  without participation.
• Group rationality
• the IEA should maximize the joint surplus of all
  signatories.
• Self-enforcement
• No country (who has not already done so) would
  want to sign.
• No country (who has signed) would want to resign.

Distribution
Renegotiation
Free riding
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Incomplete IEAs
If the game is a PD game, then the only
self-sustaining IEA is the one without any any
signatories!
In the IEA
country in the IEA
Not in the IEA
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Stable coalition of 4
6
3
The IEA has only 4 countries signing although all
would be better off everybody participated
k
3
4
14
Minimum number of signatories
In the IEA
Not in the IEA
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Stable coalition of 0 or 10
All sign
6
Minimum number of signatories
3
Not sign
k
9
3
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IEAs can change the game!
Prisoners dilemma
Partial cooperation

• A joining country has to bear the cost of
  abatement.
• The original signatories will increase their
  abatement gt reward the new country.
• A resigning country would save on abatement.
• If a country resigns, the others would reduce
  abatement gt punish the resigning country.

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General results

• The number of countries that would sign a
  self-enforcing IEA is small.
• A large subset will sign only if the gain from
  cooperation is relatively small.

The greater the number of countries that
sign, the less important is, ceteris paribus,
the agreement
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Asymmetric distribution of costs and benefits.

• Unilateral environmental problems
• river systems
• bio-diversity and the rain forest
• Reciprocal environmental problems
• Global warming (LDCs versus OECD)
• Acid rain (UK versus Scandinavian)

Side-payments transfers from winners to losers.
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Environmental game
Trade liberalization
A
P
T
N
A
T
-1,2
-3,5
4,-1
-1,4
P
N
5,-3
0,0
2,-1
0,0
PN
PT
AN
AT
PN
2,-1
7,-4
0,0
5,-3
PT
-3,5
-1,4
2,2
4,1
AN
1,1
6,-2
-1,2
4,-1
AT
-4,7
-2,6
1,4
3,3
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UC2
Cooperative outcome
7
Trade game
(3,3)
IR
2
UC1
-1
-4
7
4
-1
-3
-4
Environmental game
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Tradable permitsand global warming

• Agreement on upper bound on total emission of
  GHGs.
• Allocation of permits such that all nations gain
  gt participation.
• Net emission (net of absorption of CO2).
• Flexibility mechanisms under the Kyoto agreement.

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Problem

• Agreement over the initial distribution is a huge
  problem.

Population
GDP
OECD
OECD
LDC transition economies
Indian, China
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Summery

• Self-sustaining IEAs
• too few signatories
• need for minimum number of signatories
• Side-payments
• issue linking
• trade in emission permits
• Flexibility mechanisms
• Repeated interaction and environmental norms can
  help.

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What is next?

• Non-benevolent governments
• Voters
• Interest groups.