How Successful Will Be the Cop26 Agreement on De-Forestation?: A Game Theoretic Analysis

Abstract

We develop a participation/ratification/transfer game-theoretic model representing an international environmental agreement. Motivated by the recent COP26 Glasgow agreement attempting to eliminate deforestation activities, we develop a model that analyses the economic and behavioural incentives for the developing de-foresting nations to initially form an environmental agreement (the participation stage), and to subsequently commit to it by ratifying it (the ratification stage). We consider the economic (including transfers from the developed nations) and behavioural (warm glow) incentives to form the agreement. At the initial agreement meeting, the developed nations state that they will pay financial transfers in order to provide economic support to the developing nations who eliminate deforestation. In our model, these transfers from the developed to the developing nations come at the end of the game, and thus may be cheap-talk and lack any commitment or credibility. We consider economic (legal enforcements by the courts) and behavioural factors (conscience and warm-glow emotions) that commit the developed nations to make these credible transfers at the end of the game. Although focussing on the deforestation agreement at COP26, our model can be generalised to any environmental agreement involving groups of nations and financial transfers.

Keywords: International Environmental Agreement, Behavioural Game Theory, Transfers. Warm-glow, COP26, Deforestation

JEL Classification: D52, F53