International Climate Games: From Caps to Cooperation

24 Pages Posted: 22 Jul 2010 Last revised: 28 Aug 2010

See all articles by Peter Cramton

Peter Cramton

University of Maryland - Department of Economics

Steven Stoft

Retired Economist

Date Written: August 20, 2010

Abstract

Greenhouse gas abatement is a public good, so climate policy is a public-goods game and suffers from the free-rider incentives that make the outcome of such games notoriously uncooperative. Adopting an international agreement can change the nature of the game, reducing or exacerbating the uncooperative tendencies of the players. We analyze alternative international agreements as variations of the public-goods game, and examine the incentives for cooperation under each alternative.

The addition of cap-and-trade rules to the basic public-goods game is found to polarize the free-rider incentives of that game, encouraging those who would abate the most to target even higher abatement levels and those who would abate the least to target lower, and even negative, abatement levels. Such polarization between developed and developing countries is familiar from both the Kyoto and Copenhagen climate summits.

Since cap-and-trade rules decrease cooperation by developing countries, developed countries are led to reject the game’s outcome and in the process prevent agreement on a set of quantity targets. To break this deadlock and shift the equilibrium toward cooperation, a modification of the public-goods game based on price rather than quantities is needed. This involves a global price target and equity transfers via a Green Fund that rewards adoption of and compliance with such a target. The Nash equilibrium of one such game is analyzed for a group of three countries similar to the United States, China and India.

Keywords: cap and trade, climate change, game theory, public goods, Copenhagen, Kyoto, carbon tax, green fund, carbon pricing, global warming, greenhouse gases

JEL Classification: C72, C70, D62, H41, H40, Q25, Q54, F00

Suggested Citation

Cramton, Peter C. and Stoft, Steven, International Climate Games: From Caps to Cooperation (August 20, 2010). Available at SSRN: https://ssrn.com/abstract=1646473 or http://dx.doi.org/10.2139/ssrn.1646473

Peter C. Cramton

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States
301-405-6987 (Phone)
301-405-3542 (Fax)

Steven Stoft (Contact Author)

Retired Economist ( email )

2910 Elmwood Court
Berkeley, CA 94705
United States
(510) 644-9410 (Phone)

HOME PAGE: http://stoft.com

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