Overlapping Climate Clubs Under Transaction Costs

38 Pages Posted: 10 Nov 2018

See all articles by Emilson Delfino Silva

Emilson Delfino Silva

University of Alberta - Department of Marketing, Business Economics & Law

Chikara Yamaguchi

Hiroshima University

Multiple version iconThere are 2 versions of this paper

Date Written: October 18, 2018

Abstract

We examine the formation of multilateral, hub-and-spoke and bilateral international R&D strategic alliances (overlapping climate clubs) to reduce CO2 emissions. R&D provision in clubs produces two types of positive externalities: a global public good (i.e., reduction of CO2 emissions) and knowledge spillovers in joint R&D agreements. The latter is a club good. It is perfectly excludable. Its (direct) benefits are enjoyed by the club members only. Trust plays a central role in the type of alliance formation, if any at all. Lack of trust generates transaction costs, which increase with the number of R&D collaborators. We utilize the perfectly-coalition-proof-Nash equilibrium (PCPNE) concept to refine the set of Nash equilibria. Multilateral and hub-and-spoke coalitional structures are PCPNE, even in large economies containing all nations in the globe, in the absence of income transfers, for different values of transaction costs. With income transfers, fully participated multilateral coalitional structures are not stable; however, the size of the stable coalition increases as the economy expands.

Keywords: climate change; climate clubs; trust; coalition-proof equilibrium; overlapping coalitions; carbon capture and storage; hub-and-spoke; international environmental agreements

JEL Classification: C7; D6; D7; H4; H7; Q4; R5

Suggested Citation

Delfino Silva, Emilson and Yamaguchi, Chikara, Overlapping Climate Clubs Under Transaction Costs (October 18, 2018). University of Alberta School of Business Research Paper No. 2018-710. Available at SSRN: https://ssrn.com/abstract=3269399 or http://dx.doi.org/10.2139/ssrn.3269399

Emilson Delfino Silva (Contact Author)

University of Alberta - Department of Marketing, Business Economics & Law ( email )

Edmonton, Alberta T6G 2R6
Canada

Chikara Yamaguchi

Hiroshima University ( email )

1-2-1
Kagamiyama
Higashi-Hiroshima, Hiroshima 739-8525
Japan

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