Transfers of money can help reduce free riding. When should we give them?
We investigate the impact of side-payments to countries that have a low net benefit from participating in efficient climate cooperation in a repeated games framework with investment in different technologies. We consider different timings of these payments and different degrees of commitment. If countries cannot commit ex ante to transfer funds to low-benefit participants to an agreement, then there is a trade-off. Investment based agreements, where transfers occur before emissions are realized, but after investments have been committed, maximize the scope of cooperation. Results-based agreements minimize transfers whenever these agreements implement cooperation. If countries can commit to transfer funds, then agreements in which countries with high benefits of climate cooperation pre-commit to results-based payments to countries with low benefits both maximize the scope of cooperation and minimize transfers.
Kerr, Suzi, Steffen Lippert and Edmund Lou. 2019. “Financial Transfers and Climate Cooperation.” Motu Working Paper 19-04. Motu Economic and Public Policy Research. Wellington, New Zealand.