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Strategic Uncertainty, Indeterminacy, and the Formation of International Environmental Agreements

33 Pages Posted: 14 Mar 2016 Last revised: 5 Dec 2016

Daiju Narita

Hokkaido University; Kiel Institute for the World Economy

Ulrich J. Wagner

Department of Economics, University of Mannheim

Date Written: November 1, 2016

Abstract

Since the end of the Kyoto Protocol, global climate negotiations have shifted away from setting binding short-run targets on emissions towards placing long-term limits on global warming. We investigate how this alters the incentives for participation in a technology-centered international environmental agreement (IEA) where countries choose between conventional abatement and a breakthrough abatement technology that exhibits a network externality. When switching technologies is costly, we obtain that equilibrium adoption is indeterminate because the future adoption rate is subject to strategic uncertainty. Participation in an IEA that mandates the adoption of the breakthrough technology will be complete only if countries expect that all other countries will adopt eventually. Long-run temperature targets can be regarded as a device to coordinate countries' expectations on that outcome.

Keywords: International environmental agreements, climate policy, technology choice, dynamic game, multiple equilibria, strategic complementarity

JEL Classification: Q54, O33, H87

Suggested Citation

Narita, Daiju and Wagner, Ulrich J., Strategic Uncertainty, Indeterminacy, and the Formation of International Environmental Agreements (November 1, 2016). Available at SSRN: https://ssrn.com/abstract=2747315

Daiju Narita (Contact Author)

Hokkaido University ( email )

Kita-ku Kita 9 Nishi 7
Sapporo, Hokkaido, 060
Japan

Kiel Institute for the World Economy ( email )

P.O. Box 4309
Kiel, D-24100
Germany

Ulrich J. Wagner

Department of Economics, University of Mannheim ( email )

L7, 3-5
Mannheim, 68131
Germany
+49 621 181 1420 (Phone)

HOME PAGE: http://wagner.vwl.uni-mannheim.de

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