Transfers, self-enforcing agreements and climate cooperation
Authors: Steffen Lippert, Edmund Lou, Suzi Kerr
International agreements addressing climate change must overcome the difficulties implied by the absence of an institution with the power to ensure compliance. They have to be self-enforcing: the threat of future punishment must give participants sufficient incentives to comply with the agreed reductions in emissions voluntarily. The structure of the underlying game of choosing greenhouse gas emissions is what Albert Tucker named a Prisoner’s Dilemma (Rapoport and Chemmah, 1965). Every country has an incentive to increase their emissions unilaterally, to produce higher economic output, benefitting the individual country. The environmental costs or the increase in greenhouse gas emissions, however, are shared by the community of countries, leading to inefficiently high individual incentives to emit. In contrast, efficient global mitigation – low emissions by all countries – generates the greatest joint gains.
From folk theorems, we know that sufficiently patient players in a prisoner’s dilemma are able to sustain the first-best outcome as a subgame perfect Nash equilibrium. In the context of climate change, this means that, for patient countries, the loss of future cooperation is so large that short-run opportunistic increases in emissions today do not pay. Unfortunately, as we have learned from 30 years of climate negotiations, this theoretical insight does not easily transfer into reality.
Because we do not like where the rules of the game take us, we need to change them.