Non-linear incentive equilibrium strategies for a transboundary pollution differential game

Producción CientíficaIn this paper we apply non-linear incentive strategies to sustain over time an agreement. We illustrate the use of these strategies in a linear-quadratic transboundary pollution differential game. The incentive strategies are constructed in such a way that in the long run the pollution stock (the state variable) is close to the steady state of the pollution stock under the cooperative mode of play. The non-linear incentive functions depend on the emission rates (control variables) of both players and on the current value of the pollution stock. The credibility of the incentive equilibrium strategies is analyzed and the performance of open-loop and feedback incentive strategies is compared in their role of helping to sustain an agreement over time. We present numerical experiments to illustrate the results.This research is partially supported by MINECO under projects MTM2016-78995-P (AEI) and ECO2014-52343-P and ECO2017-82227-P (AEI) and by Junta de Castilla y León VA024P17 and VA105G18 co-financed by FEDER funds (EU

Trading for the Future: Signaling in Permit Markets

Permits markets are celebrated as a policy instrument since they allow (i) firms to equalize marginal costs through trade and (ii) the regulator to distribute the burden in a politically desirable way. These two concerns, however, may conflict in a dynamic setting. Anticipating the regulator's future desire to give more permits to firms that appear to need them, firms purchase permits to signal their need. This raises the price above marginal costs and the market becomes inefficient. If the social cost of pollution is high and the government intervenes frequently in the market, the distortions are greater than the gains from trade and non-tradable permits are better. The analysis helps to understand permit markets and how they should be designed.Tradable permits; time inconsistency; the ratchet effect; rent-seeking; plan vs. market

Applications of negotiation theory to water issues

The authors review the applications of noncooperative bargaining theory to waterrelated issues-which fall in the category of formal models of negotiation. They aim to identify the conditions under which agreements are likely to emerge and their characteristics, to support policymakers in devising the"rules of the game"that could help obtain a desired result. Despite the fact that allocation of natural resources, especially trans-boundary allocation, has all the characteristics of a negotiation problem, there are not many applications of formal negotiation theory to the issue. Therefore, the authors first discuss the noncooperative bargaining models applied to water allocation problems found in the literature. Key findings include the important role noncooperative negotiations can play in cases where binding agreements cannot be signed; the value added of politically and socially acceptable compromises; and the need for a negotiated model that considers incomplete information over the negotiated resource.Water Supply and Sanitation Governance and Institutions,Town Water Supply and Sanitation,Water and Industry,Environmental Economics&Policies,Water Conservation

Stability of Climate Coalitions in a Cartel Formation Game

We empirically test stability of climate change coalitions with the STAbility of Coalitions model (STACO). The model comprises twelve world regions and captures important dynamic aspects of the climate change problem. We apply the stability concept of internal and external stability to a cartel formation game. It is shown that only if benefits from global abatement are sufficiently high, stable coalitions emerge, though they only marginally improve upon the Nash equilibrium. We explain this phenomenon by analyzing the individual incentive structure of all regions and relate our results to the predictions of theory.International environmental agreements, Kyoto-Protocol, Cartel formation game, Non-cooperative game theory

Pollution-Reducing and Resource-Saving Technological Progress

In this paper we survey the theoretical literature on both pollution-reducing and resource-saving technological progress. The literature can be divided into two strands. One strand deals with microeconomic models which investigate incentives to adopt and to develop environmentally more friendly technologies for different policy tools and in different economic environments, such as market structure or timing and commitment structures. It turns out that, firstly, price based instruments such as emission taxes and tradable permits perform better than command and control policies, and secondly, that under competitive conditions ex ante end ex post optimal policies are equivalent. Under imperfect market conditions the policy conclusions are more subtile. The second strand of literature deals with both pollution-reducing and resource-saving technological progress within endogenous growth models. Most of these models are characterized by three market imperfections : market power for new (intermediate) products, positive R&D spillovers, and pollution. These imperfections can be mitigated by subsidies on intermediate products, subsidies on R&D effort, and a tax on emissions. Moreover, in most models there occurs a trade-off between the speed of growth and environmental quality. --pollution-reducing technological progress,resource-saving technological progress,environmental innovation,endogenous growth models

The international stock pollutant control: a stochastic formulation with transfers

This paper provides a formulation of a stochastic dynamic game that arise in the real scenario of international environmental agreements on the transnational pollution control. More specifically, this agreements try to reduce the environmental damage caused by the stock pollutant that accumulates in the atmosphere, such as CO2. To improve the non-cooperative equilibrium among countries, we propose the criteria of the minimization of the expected discounted total cost with monetary transfers between the countries involved as an incentive to cooperation. Moreover, it considers the formulation of Stochastic Dynamic Games as Markov Decision Processes, using tools of Stochastic Optimal Control and Stochastic Dynamic Programming. The performance of the proposed schemes is illustrated by its application to such environmental problem.Environmental pollutant control, Markov decision processes, Stochastic dynamic programming, Stochastic dynamic games, Optimal abatement policies

Toward a framework for implementation of climate change treaty through self-enforcing mechanisms

Global warming caused by accumulation of emissions of greenhouse gases (GHGs) is a public bad, addressing which requires collective action by all the countries of the world. Under the United Nations Convention on Climate Change (UNFCCC), most countries have negotiated the Kyoto Protocol for GHG emissions control to stabilize climate change. Several issues about the Protocol remain unresolved -- first, most of the significant countries are required to take a decision on whether or not to sign such a protocol, which has large-scale implications for their energy and industrial sectors and economic well-being; second, climate change mitigation is a public good entailing that all the countries would stand to gain due to mitigation action taken by a sub-group of one or more countries; and third, there exists no supra-national authority to enforce such a protocol for the individual sovereign nations. Thus, commitment to cooperate on an international agreement on climate change control remains tenuous. Formally, such a cooperative model is likely to be unstable. The paper discusses the pros and cons of the already proposed international cooperative mechanisms toward climate change mitigation and highlights the problem of information revelation, particularly related to the abatement issues. In this context, it attempts to outline a structure of a self-enforcing burden sharing mechanism for climate change mitigation in an incomplete information framework. The mechanism is an adoption of the well-known Vickrey-Clarke-Groves mechanism, widely used in mechanism design theory.Climate change negotiations; cooperative games; stable coalitions; self-enforcing mechanism

Trading for the Future: Signaling in Permit Markets

Tradable permits are celebrated as a political instrument since they allow (i) firms to equalize marginal abatement costs through trade and (ii) the government to distribute the burden of the policy in a politically fair and feasible way. These two concerns, however, conflict in a dynamic setting. Anticipating that high-cost firms will receive more permits in the future, firms purchase excessive amounts of permits to signal high costs. This raises the price above marginal costs and distorts abatements. In fact, it is better with non-tradable permits if the heterogeneity between the firms is small, if the (shadow) price for permits is large, and if the government redistributes permits frequently.Tradable permits, private information, signaling

Modesty Pays: Sometimes!

Standard non-cooperative game theoretical models of international environmental agreements (IEAs) draw a pessimistic picture of the prospective of successful cooperation: only small coalitions are stable that achieve only little. However, there also exist IEAs with higher participation and more success. In order to explain this phenomenon, this paper departs from the standard assumption of joint welfare maximization of coalition members, implying ambitious abatement targets and strong free-riding. Instead, it considers that countries agree on modest emission reduction targets. This may sufficiently raise participation so that the success of treaties improves in terms of global emission reduction and global welfare. Thus, modesty may pay, though the first best optimum cannot be achieved.International environmental agreements, Internal&external stability, Modest emission reduction