strategic issues in global climate change policy harry clarke

8/14/2019 Strategic Issues in Global Climate Change Policy Harry Clarke

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Strategic Issues in

Global Climate ChangePolicy

Harry Clarke

27th Australasian Economic TheoryWorkshop Auckland


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Climate changemitigation

Examine prospects for reaching aglobal cooperative agreement to

mitigate GGEs.


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Background

Common property problems involve

textbook Prisoners Dilemma issues .

How do side policies,

embarrassment effects, carbonleakages & policy commitmentsaffect this?


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Description.

US & China provide > 50% of GGEs.Large.

13 countries provide 30% then a fringeof small countries - like Australia -

provide 20%.

Problem to derive an international

agreement.


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Intuition

Each country may/may not gain fromunilateral mitigation depends onsize & moral suasion impacts.

Each gains most ifall mitigate.

Irrespective of stance of others eachmay gain most by not mitigating.


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Model 1: US & China

Choices: mitigate (M) or not (DM).

National benefits u c are actual

environmental costs/benefits dont

reflect prestige or embarrassmenteffects.

Spill-overs to other party Buc & Bcu.


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Carbon leakages

Without global GGE tax (or freelytraded carbon quotas) can be carbonleakages.

If US (u) controls GGEs but China (c)does not there is a cost to u of Luu &

gain to c of Luc.


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The game.

Two Country Game with Carbon

Leakage

US

M DM

China

M c

+Buc

, u

+Bcu

c

-Lcc

, Bcu

+Lcu

DM Buc

+Luc

, u

-Luu

0,0


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Analysis

Spill-overs & leakages impactasymmetrically.

For US to have dominant strategymitigate:

u > max(Lcu , Luu)

US must gain more than it loses by

mitigating alone (Luu) or gains by being


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Carbon leakagesimportant?

Tighten conditions for each countryto find it individually rational to

unilaterally mitigate.

But empirically important? Evidence

from EU experience suggestsunimportant.

In some cases side policies can


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Side policies forleakages

Destination accounting based on GGEconsumption.

Main difficulty is probable illegality ofspecific border taxes underArticle 1 GATT.

Practical difficulties - assessing carboncontent of goods produced with differenttechnologies.


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Side policies

Also problems with rebating taxeslocal firms pay on exported output.

Can do this lump-sum to limit

disadvantage & incentive to diverthigh GGE outputs overseas. Withoutput-based rebate there is adistorting incentive to export high

GGE goods.


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PDs

Leakages increase likelihood of PDs more likely countries have dominantstrategies ofnot mitigating.

Countries can lose a lot by going italone in mitigating. Can also gain alot by not mitigating when others do.


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Embarrassment costs

Increase payoffs when all other

countries mitigate but you dont.

If large can transform PD to anAssurance game with (M,M) & (DM,DM)

being Nash equilibria but where eachprefers (M,M).

Prospects for co-operation

improve.


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PD structures

PD obtains when local pollutionissues are insufficient to drive

mitigation but the outcome whereboth mitigate is collectively rational.

Less standard outcome - collectivelybest if one country mitigates.Requires payoff asymmetry + side-payment.


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u compensates c with $ tomitigate

(10 > > 0)

Two Country Game

US

M DM

China

M 0.5+, 6- , 10-

DM 1,-4 0,0


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Transfers

Transfers make sense if one countryhas high MWTP for GGE mitigationbut faces high abatement costs.

Can be understood using publicgoods model.


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Publicgoodsmodel

MCmin lies inChina tocutbacklevel G.

AggregatingMWTPs - allcutbacks inChina.

Cost AEG*0.

Of thisbenefitsprinciplesuggests

FEAB paidby US.

$

G G E c u t b a c k s

M C m i n

A

B

E

F

0G *

M W T P u + M W T P c

M W T P c

M W T P u

GG c

A 'E '


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Benefits principle implemented byGGE quota allocation.

This can be implemented by appropriatequota allocation.


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A striking (&implausible) result

Assumes all low cost options in China & thatUS can compensate China for making cuts

with a price covering mitigation costs.

But general implication sound - efficiency-driven transfers from rich to poor

countries can meet GGE targets atminimum cost.


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CDM

Rationale for CDM under Kyoto.
http://en.wikipedia.org/wiki/Clean_Development_Mechanismhttp://en.wikipedia.org/wiki/Clean_Development_Mechanism


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Penalties

Non-co-operation in common propertymanagement resolvable usingpenalties.

Penalties on a single non-mitigator canturn PD intoAssurance game.

If imposed on all game can become onewhere all have dominant strategiesto mitigate.


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What penalties?

Might impose retaliatory tariffs(Kyoto tariffs) against non-mitigators as Europe threatened todo to US.

Strange & costly! - penalises allwhowould otherwise derive enhancedgains-from-trade.


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Gersbach proposal

All industrialised countries contributeinitially to a Global RefundingSystem (GRS).

Each country receives refundproportionate its GGE reduction overprevious year relative to global GGEreduction over previous year.

Each country sets its own GGE taxes

but all tax revenue paid to GRS.


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Non-PD games

Leadership games - sometimes possibile.Might make sense.

Chicken games can only work with carbonleakages. Each prefers to be sole mitigator butprefers joint mitigation to frying.

Assurance games as observed, can arisewith embarrassment or with punishments.Otherwise to arise naturally - need carbonleakages.


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Multi-country models

N = 3. US, China & Europe.

Interesting because of asymmetricalmitigating incentives (compare US &

Europe).

Nothing much changes unless

account for carbon leakages.


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Main leakage results

A non-mitigating countrythinking about mitigating will

focus on:

Carbon leakage costs accrued as

consequence of mitigating.

Carbon leakage benefits forgone byholding out & hoping everyone else

mitigates.


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Mitigation contagion

If an extra country mitigates doesthat enhance mitigation incentives ofcurrent non-mitigators?

Some improvement - less carbonleakage losses but still enhancedprospects of large gains by holdingout to be last non-mitigator.


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Moral suasion effects

Insights from behavioural economics &reciprocity literature.

When do people cooperate though notindividually rational to do so?

If they see others doing so or attempting to

do so (irrespective of consequences).

Results for individuals not groups. Forgroups evidence goes both ways.


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Self-serving biases - maylimit reciprocity

Perceptions of fairness converge on self-interest.

Rich policymakers may avoid ethics ofdeveloping country needs because ofdiscomfit.

Cognitive dissonance may lead emitters todeny damages.

Policy implication force negotiators to


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Intermediate & noregrets policy

Few results.

China might pursue no regretsoptions with low spill-overs.

Implications for other countries?


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If China commits to noregrets:

(rather than not mitigating)

Case for US to mitigate fully is

strengthened - now smaller potentialcarbon leakage losses


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Repeated game view &cheating

Analysis well-known. For brevity Ill ignore.


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Dynamics

Numerous ways of dynamising.

Consider now /future setting with 2countries (China, US).

Ignore carbon leakages.

Suppose GGE control a luxury good withlow quantity demanded now in China.


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Dynamics - US

May place higher weight on environment now &retaining quality into the future.

Face lower future impacts & adaptation costs

from unmitigated change.

Will recognise incentives China faces to under-supply mitigation now but to more fully mitigate

in future.

Recognition China faces severe costs ofadaptation in future which tempers pressure to

shift mitigation responses forward.


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Conclusion

These notes throw light on theinsight that it is important for nationsto put themselves in the shoes ofothers to resolve climate change

issues.


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Thank you

strategic issues in global climate change policy harry clarke

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