Self-Enforcing Climate Agreements: Kyoto Versus Paris

Abstract

This paper compares the Kyoto Protocol and the Paris Agreement in the dynamic game of Battaglini and Harstad (2016). The symmetric Nash bargaining solution reflects the Kyoto Protocol, whereas in the Paris Agreement coalition countries maximize a country-specific asymmetric Nash product. In the last period of a climate contract, the coalition countries underinvest, which leads to a hold-up problem. The stable climate coalition is small in the Kyoto Protocol and large in the Paris Agreement, but the emissions reductions of a single coalition country are more pronounced in the former than in the latter. This per-country-emissions-reduction effect outweighs the disadvantageous coalition-size effect if the hold-up problem is irrelevant in the Paris Agreement. By contrast, if the hold-up problem is relevant in the Paris Agreement, emissions reductions of a single coalition country can be significant and the Paris Agreement can outperform the then slightly deeper but much narrower Kyoto Protocol.

Keywords: pledge and review, emissions, investments, stable coalition