Incorporating Fairness Motives into the Impulse Balance Equilibrium and Quantal Response Equilibrium Concepts: An Application to 2x2 Games

Substantial evidence has accumulated in recent empirical works on the limited ability of the Nash equilibrium to rationalize observed behavior in many classes of games played by experimental subjects. This realization has led to several attempts aimed at finding tractable equilibrium concepts which perform better empirically; one such example is the impulse balance equilibrium (Selten, Chmura, 2008), which introduces a psychological reference point to which players compare the available payoff allocations. This paper is concerned with advancing two new, empirically sound, concepts: equity-driven impulse balance equilibrium (EIBE) and equity-driven quantal response equilibrium (EQRE): both introduce a distributive reference point to the corresponding established stationary concepts known as impulse balance equilibrium (IBE) and quantal response equilibrium (QRE). The explanatory power of the considered models leads to the following ranking, starting with the most successful in terms of fit to the experimental data: EQRE, IBE, EIBE, QRE and Nash equilibrium.Fairness, Inequity aversion, Aspiration level, Impulse balance, Quantal Response, Behavioral economics, Experimental economics

Uncertain R&D, Backstop Technology and GHGs Stabilization

This paper analyses optimal investments in innovation when dealing with a stringent climate target and with the uncertain effectiveness of R&D. The innovation needed to achieve the deep cut in emissions is modelled by a backstop carbon-free technology whose cost depends on R&D investments. To better represent the process of technological progress, we assume that R&D effectiveness is uncertain. By means of a simple analytical model, we show how accounting for the uncertainty that characterizes technological advancement yields higher investments in innovation and lower policy costs. We then confirm the results via a numerical analysis performed with a stochastic version of WITCH, an energy-economy-climate model. The results stress the importance of a correct specification of the technological change process in economy-climate models.Climate Change, Information and Uncertainty, Environmental Policy, Optimal R&D Investments

Nuclear versus Coal plus CCS: A Comparison of Two Competitive Base-load Climate Control Options

In this paper we analyze the relative importance and mutual behavior of two competing base-load electricity generation options that each are capable of contributing significantly to the abatement of global CO2 emissions: nuclear energy and coal-based power production complemented with CO2 capture and storage (CCS). We also investigate how, in scenarios from an integrated assessment model that simulates the economics of a climate-constrained world, the prospects for nuclear energy would change if exogenous limitations on the spread of nuclear technology were relaxed. Using the climate change economics model WITCH we find that until 2050 the resulting growth rates of nuclear electricity generation capacity become comparable to historical rates observed during the 1980s. Given that nuclear energy continues to face serious challenges and contention, we inspect how extensive the improvements of coal-based power equipped with CCS technology would need to be if our model is to significantly scale down the construction of new nuclear power plants.Economic Competition, Electricity Sector, Nuclear Power, Coal Power, CCS, Renewables, Climate Policy

The WITCH Model. Structure, Baseline, Solutions

WITCH – World Induced Technical Change Hybrid – is a regionally disaggregated hard-link hybrid global model with a neoclassical optimal growth structure (top-down) and a detailed energy input component (bottom-up). The model endogenously accounts for technological change, both through learning curves that affect the prices of new vintages of capital and through R&D investments. The model features the main economic and environmental policies in each world region as the outcome of a dynamic game. WITCH belongs to the class of Integrated Assessment Models as it possesses a climate module that feeds climate changes back into the economy. Although the model’s main features are discussed elsewhere (Bosetti et al., 2006), here we provide a more thorough discussion of the model’s structure and baseline projections, to describe the model in greater detail. We report detailed information on the evolution of energy demand, technology and CO2 emissions. We also explain the procedure used to calibrate the model parameters. This report is therefore meant to provide effective support to those who intending to use the WITCH model or interpret its results.Climate Policy, Hybrid Modelling, Integrated Assessment, Technological Change

Delayed Participation of Developing Countries to Climate Agreements: Should Action in the EU and US be Postponed?

This paper analyses the cost implications for climate policy in developed countries if developing countries are unwilling to adopt measures to reduce their own GHG emissions. First, we assume that a 450 CO2 (550 CO2e) ppmv stabilisation target is to be achieved and that Non Annex1 (NA1) countries decide to delay their GHG emission reductions by 30 years. What would be the cost difference between this scenario and a case in which both developed and developing countries start reducing their emissions at the same time? Then, we look at a scenario in which the timing of developing countries’ participation is uncertain and again we compute the costs of climate policy in developed and developing countries. We findthat delayed participation of NA1 countries has a negative impact on climate policy costs. Economic inefficiencies can be as large as 10-25 TlnUSD. However, this additional cost wanes when developing countries are allowed to trade emission reductions from their baseline emission paths during the 30-year delay period. Thus, irrespective of whether NA1 countriesare immediately assigned an emission reduction target or not, they should nonetheless be included in a global carbon market. Technology deployment is also affected by the timing of developing countries’ mitigation measures. Delayed NA1-country participation in a climateagreement would scale down the deployment of coal with CCS throughout the century. Onthe other hand, innovation in the form of energy R&D investments would be positivelyaffected, since it would become crucial in developed countries. Finally, uncertainty about the timing of NA1-country participation does not modify the optimal abatement strategy for developed countries and does not alter policy costs as long as a global carbon market is in place.delayed action, climate policy, stabilisation costs, uncertain participation

The Survival of the Conformist: Social Pressure and Renewable Resource Management

This paper examines the role of pro-social behavior as a mechanism for the establishment and maintenance of cooperation in resource use under variable social and environmental conditions. By coupling resource stock dynamics with social dynamics concerning compliance to a social norm prescribing non-excessive resource extraction in a common pool resource (CPR), we show that when reputational considerations matter and a sufficient level of social stigma affects the violators of a norm, sustainable outcomes are achieved. We find large parameter regions where norm-observing and norm-violating types coexist, and analyze to what extent such coexistence depends on the environment.Cooperation, Social Norm, Ostracism, Common Pool Resource, Evolutionary Game Theory, Replicator Equation, Agent-based Simulation, Coupled Socio-resource Dynamics

Climate Change Mitigation Strategies in Fast-Growing Countries: The Benefits of Early Action

This paper builds on the assumption that OECD countries are (or will soon be) taking actions to reduce their greenhouse gas emissions. These actions, however, will not be sufficient to control global warming, unless developing countries also get involved in the cooperative effort to reduce GHG emissions. This paper investigates the best short-term strategies that emerging economies can adopt in reacting to OECD countries’ mitigation effort, given the common long-term goal to prevent excessive warming without hampering economic growth. Results indicate that developing countries would incur substantial economic losses by following a myopic strategy that disregards climate in the short-run, and that their optimal investment behaviour is to anticipate the implementation of a climate policy by roughly 10 years. Investing in innovation ahead of time is also found to be advantageous. The degree of policy anticipation is shown to be important in determining the financial transfers of an international carbon market meant to provide incentives for the participation of developing countries. This is especially relevant for China, whose recent and foreseeable trends of investments in innovation are consistent with the adoption of domestic emission reduction obligations in 2030.Energy-economy Modeling, Climate Policy, Developing Countries

Alternative Paths toward a Low Carbon World

This paper analyzes the economic and investment implications of a series of climate mitigation scenarios, characterized by different levels of ambition in terms of long term stabilization goals and the transition to attain them. In particular, the implications of fairly ambitious scenarios are investigated for the first time by means of the model WITCH. Although milder climate objectives can be achieved at moderate costs, our results show that stringent stabilization paths, compatible with the target of the European Union and the G8, might have important economic repercussions. The timing of mitigation action influences the cost of meeting a target as well the stringency of the targets we can aspire to. To contain costs it is crucial to rely on a wide mitigation portfolio. Strong reductions in energy consumption through enhanced energy efficiency and life style changes are needed to achieve stringent climate policies. The analysis carried out in the present paper contains several idealistic assumptions that could be violated in the real world where some technologies may not be fully available, technology transfers and diffusion are imperfect, some world regions may not accept to reduce their GHG emissions, trading might be limited to some sectors or to a fraction of the total abatement effort, etc. This would increase the challenge of climate protection and the costs of reducing GHG emissions.Climate Policy, Stabilization Costs

Climate Change Mitigation Strategies in Fast-Growing Countries: The Benefits of Early Action

This paper builds on the assumption that OECD countries are (or will soon be) taking actions to reduce their greenhouse gas emissions. These actions, however, will not be sufficient to control global warming, unless developing countries also get involved in the cooperative effort to reduce GHG emissions. This paper investigates the best short-term strategies that emerging economies can adopt in reacting to OECD countries’ mitigation effort, given the common long-term goal to prevent excessive warming without hampering economic growth. Results indicate that developing countries would incur substantial economic losses by following a myopic strategy that disregards climate in the short-run, and that their optimal investment behaviour is to anticipate the implementation of a climate policy by roughly 10 years. Investing in innovation ahead of time is also found to be advantageous. The degree of policy anticipation is shown to be important in determining the financial transfers of an international carbon market meant to provide incentives for the participation of developing countries. This is especially relevant for China, whose recent and foreseeable trends of investments in innovation are consistent with the adoption of domestic emission reduction obligations in 2030.energy-economy modelling, climate policy, developing countries

Coordinating to protect the global climate: Experimental evidence on the role of inequality and commitment

Free riding and coordination difficulties are held to be the primary causes of cooperation breakdown among nonrelatives. These thwarting effects are particularly severe in the absence of effective monitoring institutions capable of sanctioning deviant behavior. Unfortunately, solutions to global environmental dilemmas, like climate change, cannot depend on coercion mechanisms, given the transnational effects of emissions. A further complication is that it yields 'common but differentiated responsibilities'. Such asymmetries in wealth and carbon responsibilities among the actors, and the ensuing issues of equity, might further impede cooperation. Yet, a growing literature stresses the importance of non-economic factors in explaining human behavior; therefore, instruments that go beyond the traditional incentives might prove effective in facilitating the task. Given the empirical nature of the problem, we address it by means of a controlled laboratory experiment: a framed threshold public goods game is used to investigate the degree of cooperation and coordination achieved by groups of six participants in combating simulated catastrophic climate change. While necessarily simple for the sake of tractability, the game is designed to incorporate key real-world issues, such as inequity and the impact of emergent institutions based on nonbinding 'pledge and review' mechanisms. --experimental economics,threshold public goods game,climate change,inequality,pledge