By Erik Ansink
Reactions by policy-makers and part of the general public to recent events like (1) the European school climate strikes, (2) the proposed US Green New Deal, and (3) the Dutch Urgenda lawsuit showcase that the costs of climate change policies are high. At least, they are perceived as being too high compared to the expected benefits of such policies. Especially so, when one considers only local benefits.
Climate change is a textbook example of a situation where the interests of individual countries are not perfectly aligned with what is good for the world as a whole. Reductions in greenhouse gas emissions are a global public good. Such emissions abatement is costly only to the country that makes the abatement effort, but they benefit all countries. As a result, there is an incentive for each country to make only modest abatement efforts while free-riding on others’ abatement efforts.
For a treaty to be effective it should be self-enforcing: countries should have an incentive to participate and comply with the treaty.
In economic terms, this is not an efficient outcome. Global welfare could be increased enormously if countries were to coordinate their emissions abatement. Alas, there is no supra-national authority that can regulate such coordination. As a result, coordination should be based on voluntary agreements between countries, for instance in a “climate treaty”. An effective treaty would lead to lower concentrations of greenhouse gas emissions and, ultimately, reduced impacts of climate change. For a treaty to be effective it should be self-enforcing: countries should have an incentive to participate and comply with the treaty. The design of an international climate treaty was the core idea behind the first UN climate summit, organized in Berlin in 1995. It was followed by 25 subsequent summits to date. In general, these summits have not created effective or self-enforcing treaties. A case in point is Canada withdrawing from the 1997 Kyoto protocol. And only recently did the USA announce its withdrawal from the 2015 Paris agreement.
In a recent project (Ansink et al., 2018) we assessed an old design idea for climate treaties which was never properly analyzed (Carraro & Siniscalco, 1993). This design would make self-enforcement easier and could, potentially, lead to climate treaties with more signatories. The core idea of this design is that some countries would be better off by not joining the treaty but rather by supporting the countries in the treaty. We assessed this design both theoretically and numerically, using a so-called cartel formation game (Barrett, 1994). This type of game is often used to analyze self-enforcement of climate treaties. To this model we add support via monetary transfers, but other options are possible too.
The presence of support generates higher incentives to participate and comply, as expected. The main challenge is to show that supporters are actually willing to provide support rather than just free-riding on the treaty countries’ abatement efforts. It turns out that, largely independent of the number of countries in the climate treaty, the additional benefits of having more countries in the treaty is enough to compensate for the costs of providing support. Hence, our main result is to show that this design leads to larger climate treaties, which are more effective but still self-enforcing.
The option of support allows countries to work towards global emissions abatement in differentiated ways, a central tenet in climate change negotiations (Olmstead & Stavins, 2012). A subset of countries can take the lead by joining the climate treaty while others contribute by supporting those that are in the treaty. As a result, all are better off than in the situation without support. Let’s hope that this idea, or one of several competing ideas on how to design climate treaties (e.g. Nordhaus, 2015), finds its way to the negotiation table at the next UN climate summit, scheduled for December in Chile.
- Ansink, E., H.-P. Weikard, and C. Withagen. (2018). International environmental agreements with support. Forthcoming in Journal of Environmental Economics and Management.
- Barrett, S. (1994). Self-enforcing international environmental agreements. Oxford Economic Papers 46(S), 878–894.
- Carraro, C. and D. Siniscalco (1993). Strategies for the international protection of the environment. Journal of Public Economics 52(3), 309–328.
- Nordhaus, W. (2015). Climate clubs: Overcoming free-riding in international climate policy. American Economic Review 105(4), 1339-70.
- Olmstead, S. and R. Stavins (2012). Three key elements of a post-2012 international climate policy architecture. Review of Environmental Economics and Policy 6(1), 65–85.