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

New Roads to International Environmental Agreements: The Case of Global Warming

We analyze with an integrated assessment model of climate change the formation of interna-tional environmental agreements (IEAs) by applying the widely used concept of inter-nal & external stability and several modifications of it. We relax the assumptions of a single agreement and open membership rule. It turns out that regional agreements are superior to a single agreement and exclusive is superior to open membership in welfare and ecological terms. Moreover, we show the importance of transfers for successful treaty-making. We relate our results to the design of current and past IEAs as well as to other issues of international policy coordination.Design of climate treaty protocol, Coalition formation, Non-cooperative game theory

International Environmental Agreements under Uncertainty: Does the Veil of Uncertainty Help?

Na and Shin (1998) showed that the veil of uncertainty can be conducive to the success of self-enforcing international environmental agreements. Later papers confirmed this negative conclusion about the role of learning. In the light of intensified research efforts worldwide to reduce uncertainty about the environmental impact of emissions and the cost of reducing them, this conclusion is intriguing. The purpose of this paper is threefold. First, we analyze whether the result carries over to a more general setting without restriction on the number of players and which considers not only no and full learning but also partial learning. Second, we test whether the conclusion also holds if there is uncertainty about abatement costs instead of uncertainty about the benefits from global abatement. Third, we propose a transfer scheme that mitigates the possible negative effect of learning and which may even transform it into a positive effect.transnational cooperation, self-enforcing international environmental agreements, uncertainty, learning

Coalition Formation in a Global Warming Game: How the Design of Protocols Affects the Success of Environmental Treaty-Making

We combine the newest concepts of non-cooperative coalition theory with a computable general equilibrium model close to the seminal RICE-model of Nordhaus and Yang (1996) to determine stable coalition structures in a global warming game. We consider three coalition games that allow for the formation of multiple coalitions. The coalition games represent different designs of climate treaty protocols. Counterintuitively, it turns out that treaties based on a unanimous decision rule and exclusive membership lead to superior outcomes than treaties with open membership. We also demonstrate that if coalition formation is not restricted to a single coalition, as this has been done previously in the literature, coalition structures with multiple coalitions will emerge in equilibrium. Most of the regional agreements are superior to single agreements. Moreover, our findings confirm those derived from simpler theoretical models that a cleverly designed transfer scheme can foster cooperation and that from the number of participants the success of a treaty cannot be inferred. They also support a conjecture of theory that in the case of greenhouse gases stable coalition structures (partial cooperation) can close the gap between the global optimum (full cooperation) and the Nash equilibrium (no cooperation) by a substantial amount.design of climate treaty protocol, coalition formation, non-cooperative game theory

A Non-cooperative Foundation of Core-Stability in Positive Externality NTU-Coalition Games

We identify the core as an appealing stability concept of cooperative game theory, but argue that the non-cooperative approach has conceptual advantages in the context of economic problems with externalities. Therefore, we derive a non-cooperative foundation of core-stability for positive externality NTU-games. First, in the spirit of Hart/Kurz (1983), we develop a game that we call ?-game and show that strong Nash equilibria coalition structures in this game are identical to ?- and ?-core stable coalition structures. Second, as a by-product of the definition of the ?-game, we develop an extension called an ?-game. Finally, we compare equilibria in the ?- and ?-game with those in the ?- and ?-game of Hart and Kurz (1983).Core-stability, non-cooperative game theory, positive externality games

New Roads to International Environmental Agreements: The Case of Global Warming

We analyze with an integrated assessment model of climate change the formation of international environmental agreements (IEAs) by applying the widely used concept of internal& external stability and several modifications of it. We relax the assumptions of a single agreement and open membership rule. It turns out that regional agreements are superior to a single agreement and exclusive is superior to open membership in welfare and ecological terms. Moreover, we show the importance of transfers for successful treaty-making. We relate our results to the design of current and past IEAs as well as to other issues of international policy coordination.design of climate treaty protocol, coalition formation, non-cooperative game theory

An Empirical Assessment of Measures to Enhance the Success of Global Climate Treaties*

We analyze important forces that hamper the formation of successful self-enforcing agreements to mitigate global warming. The analysis combines two modules: a) a computable general equilibrium model that captures the feedback between the economy, environmental damages and the climate system and b) a game theoretic model that determines stable coalitions in the presence of free-riding incentives. We consider two types of measures to enhance the success of international environmental treaty-making: a) transfers, aiming at balancing asymmetric gains from cooperation; b) institutional changes, aiming at making it more difficult to upset stability of a treaty. We find that institutional changes may be as important as transfers and should therefore receive more attention in future international negotiations.design of climate treaty protocol, coalition formation, non-cooperative game theory, integrated assessment model

How the Rules of Coalition Formation Affect Stability of International Environmental Agreements

This paper compares stability of international environmental agreements for six different rules of coalition formation under very general conditions (any type of heterogeneity between countries). The rules can be interpreted as different institutional settings in which treaty formations take place and/or different designs of agreements. We consider open and restricted open membership game as well as four exclusive membership games with different degrees of unanimity required to form coalitions. From a policy perspective, counterintuitively, it turns out that stability is higher under exclusive than under open membership and stability increases with the degree of unanimity. We discuss the policy implications of our result for future treaty-making.Non-cooperative game theory, Rules of coalition formation, Stability

An Almost Ideal Sharing Scheme for Coalition Games with Externalities

We propose a class of sharing schemes for the distribution of the gains from cooperation for coalition games with externalities. In the context of the partition function, it is shown that any member of this class of sharing schemes leads to the same set of stable coalitions in the sense of d’Aspremont et al. (1983). These schemes are “almost ideal” in that they stabilize these coalitions which generate the highest global welfare among the set of “potentially stable coalitions”. Our sharing scheme is particularly powerful for economic problems that are characterized by positive externalities from coalition formation and which therefore are likely to suffer from severe free-riding.coalition games, partition function, externalities, sharing schemes

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