Strategic Uncertainty, Indeterminacy, and the Formation of International Environmental Agreements
33 Pages Posted: 14 Mar 2016 Last revised: 5 Dec 2016
Date Written: November 1, 2016
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: Suggested Citation