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CHAPTER 9 International environmental problems. Learning objectives How do international environmental problems differ from national (or sub-national)

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1 CHAPTER 9 International environmental problems

2 Learning objectives How do international environmental problems differ from national (or sub-national) problems? What additional issues are raised by virtue of an environmental problem being international? What insights does game theory bring to our understanding of international environmental policy? What determines the degree to which cooperation takes place between countries and policy is coordinated? Put another way, which conditions favour (or discourage) the likelihood and extent of cooperation between countries? Why is cooperation typically a gradual, dynamic process, with agreements often being embodied in treaties or conventions that are general frameworks of agreed principles, but in which subsequent negotiation processes determine the extent to which cooperation is taken? Is it possible to use such conditions to explain how far efficient cooperation has gone concerning upper-atmosphere ozone depletion, and global climate change?

3 Game theory analysis Game theory is used to analyse choices where the outcome of a decision by one player depends on the decisions of the other players, and where decisions of others are not known in advance. This interdependence is evident in environmental problems. For example, where pollution spills over national boundaries, expenditures by any one country on pollution abatement will give benefits not only to the abating country but to others as well. Similarly, if a country chooses to spend nothing on pollution control, it can obtain benefits if others do so. So in general the pay-off to doing pollution control (or not doing it) depends not only on one’s own choice, but also on the choices of others. We use game theory to investigate behaviour in the presence of global or regional public goods. The arguments also apply to externalities that spill over national boundaries.

4 Two-player binary-choice games

5 Y’s strategy X’s strategy Strategy 1Strategy 2 Strategy 1a, ab, c Strategy 2c, bd, d Figure 9.1 Two player binary choice games

6 Y’s strategy X’s strategy PolluteAbate Pollute0, 05, -2 Abate-2, 53, 3 Figure 9.2 A two-player pollution abatement game The payoff matrix here has a structure of payoffs known as a Prisoners’ Dilemma X and Y are two countries, each of which faces a choice of whether to abate pollution or not to abate pollution (labelled ‘Pollute’). Pollution abatement is assumed to be a public good so that abatement by either country benefits both. Abatement comes at a cost of 7 to the abater, but confers benefits of 5 to both countries. If both abate both experience benefits of 10 (and each experiences a cost of 7).

7 Characteristics of this solution 1.The fact that neither country chooses to abate pollution implies that the state of the environment will be worse than it could be. 2.The solution is also a Nash equilibrium. –A set of strategic choices is a Nash equilibrium if each player is doing the best possible given what the other is doing. –Put another way, neither country would benefit by deviating unilaterally from the outcome, and so would not unilaterally alter its strategy given the opportunity to do so. 3.The outcome is inefficient. Both countries could do better if they had chosen to abate (in which case the pay-off to each would be three rather than zero).

8 Why has this state of affairs come about? 1.The game has been played non-cooperatively. We shall examine shortly how things might be different with cooperative behaviour. 2.The second concerns the pay-offs used in Figure 9.2. These pay-offs determine the structure of incentives facing the countries. They reflect the assumptions we made earlier about the costs and benefits of pollution abatement. In this case, the incentives are not conducive to the choice of abatement. 3.The pay-off matrix in Figure 9.2 is an example of a so-called Prisoner’s Dilemma game. The Prisoner’s Dilemma is the name given to all games in which the pay-offs, when put in ordinal form, are as shown in Figure 9.3.

9 Y’s strategy X’s strategy PolluteAbate Pollute2, 24, 1 Abate1, 43, 3 Figure 9.3 The two-player pollution abatement Prisoners’ Dilemma game: ordinal form

10 In all Prisoner’s Dilemma games, there is a single Nash equilibrium. This Nash equilibrium is also the dominant strategy for each player. The pay-offs to both countries in the dominant strategy Nash equilibrium are less good than those which would result from choosing their alternative, dominated strategy. As we shall see in a moment, not all games have this structure of pay-offs. However, so many environmental problems appear to be examples of Prisoner’s Dilemma games that environmental problems are routinely described as Prisoner’s Dilemmas.

11 A ‘cooperative’ solution Suppose that countries were to cooperate, perhaps by negotiating an agreement. Would this alter the outcome of the game? Intuition would probably lead us to answer yes. If both countries agreed to abate – and did what they agreed to do – pay-offs to each would be 3 rather than 0. In a Prisoner’s Dilemma cooperation offers the prospect of greater rewards for both countries, and in this instance superior environmental quality. But this tentative conclusion is not robust.

12 Sustaining the cooperative’ solution Can these greater rewards be sustained? If self-interest governs behaviour, they probably cannot. To see why, note that the {Abate, Abate} outcome is not a Nash equilibrium. There is no external authority with the authority to impose a binding agreement. Moreover, this agreement is not ‘self-enforcing’. Each country has an incentive to defect from the agreement – to unilaterally alter its strategy once the agreement has been reached.

13 Other forms of game Not all games have the structure of the Prisoner’s Dilemma (PD). Even where a game does have a PD pay-off matrix structure, the game may be played repeatedly. –As we shall see later, repetition substantially increases the likelihood of cooperative outcomes being obtained. Furthermore, there may be ways in which a PD game could be successfully transformed to a type that is conducive to cooperation. We now look at some other game structures.

14 Y’s strategy X’s strategy PolluteAbate Pollute-4, -45, -2 Abate-2, 53, 3 Figure 9.4 A two-player Chicken game

15 Abate Pollute Abate Pollute X’s choice Y’s choice Pollute (-4, -4) (5, -2) (-2, 5) (3,3) Figure 9.5 Extensive form of Chicken game

16 Leadership A strategy in which both countries abate pollution could be described as the “collectively best solution” to the Chicken game as specified in Figure 9.4; it maximises the sum of the two countries pay-offs. But that solution is not stable, because it is not a Nash equilibrium. Given the position in which both countries abate, each has an incentive to defect (provided the other does not). A self-enforcing agreement in which the structure of incentives leads countries to negotiate an agreement in which they will all abate and in which all will wish to stay in that position once it is reached does not exist here. However, where the structure of pay-offs has the form of a Chicken game, we expect that some protective action will take place. Who will do it, and who will free-ride, depends on particular circumstances. Leadership by one nation (as by the USA in the case of CFC emissions reductions) may be one vehicle through which this may happen.

17 B’s strategy A’s strategy Do not Contribute Do not contribute0, 00, -8 Contribute-8, 04, 4 Figure 9.6 A two-player Assurance game

18 Games with multiple players

19 Our example Most international environmental problems involve several countries and global problems a large number. Much of what we have found so far generalises readily to problems involving more than two countries. Let N be the number of countries affected by some environmental problem, where N ≥ 2. For simplicity, we assume that each of the N countries is identical. We revisit the Prisoner’s Dilemma example. As before, each unit of pollution abatement comes at a cost of 7 to the abating country; it confers benefits of 5 to the abating country and to all other countries. For the case where N = 10, the pay-off matrix can be described in the form of Table 9.1.


21 Structure of pay-offs The structure of pay-offs is critical in determining whether cooperation can be sustained. Following Barrett (1997), we explore the pay-offs to choices in a more general way. Denote NBA as the net benefit to a country if it abates and NBP as the net benefit to a country if it pollutes (does not abate). Let there be N identical countries, of which K choose to abate. We define the following pay-off generating functions: NBP = a + bK; NBA = c + dK where a, b, c and d are parameters.

22 Structure of pay-offs NBP = a + bK; NBA = c + dK By altering these parameter values, we generate different pay-off matrices. For the problem in Table 9.1 we have a = 0, b = 5, c = –7 and d = 5.

23 Figure 10.7 The payoffs to one country from abating and from not abating as the number of other countries abating varies. Figure 9.7.

24 Figure 9.8 The payoffs to one country from abating and from not abating as the number of other countries abating varies: alternative set of parameter values

25 Figure 9.9 The payoffs to one country from abating and from not abating as the number of other countries abating varies: third set of parameter values (a = 0, b =5, c = 3 and d = 3)

26 Continuous choices about the extent of abatement We can generalise the discussion by allowing countries to choose – or rather negotiate – abatement levels. This can be done with some simple algebra. We leave you to read this for yourself; here just report some key results. Non-cooperative behaviour Each country chooses its level of abatement to maximise its pay-off, independently of – and without regard to the consequences for – other countries. That is, each country chooses its abatement level, z, conditional on z being fixed in all other countries. The solution: each country abates up to the point where its own marginal benefit of abatement is equal to its marginal cost of abatement.

27 Full cooperative behaviour Full cooperative behaviour consists of N countries jointly choosing levels of abatement to maximise their collective pay-off. This is equivalent to what would happen if the N countries were unified as a single country that behaved rationally. The solution: abatement in each country is chosen jointly to maximise the collective pay-off. This is the usual condition for efficient provision of a public good. That is, in each country, the marginal abatement cost should be equal to the sum of marginal benefits over all recipients of the public good. The full cooperative solution can be described as collectively rational: it is welfare-maximising for all N countries treated as a single entity. If a supranational government existed, acting to maximise total net benefits, and had sufficient authority to impose its decision, then the outcome would be the full cooperative solution.

28 MC i MB i MB Z ZNZN ZCZC Figure 9.10 A comparison of the non-cooperative and full cooperative solutions to an environmental public good problem

29 International environmental agreements (IEAs) Role of UN framework: linkage of issues - environmental protection, environmental sustainability and economic development. But much of what is important has been dealt with at regional or bilateral levels, and takes place in relatively loose, informal ways. The need for international treaties arises from the fact that political sovereignty resides principally in nation states. The European Union may be a challenge to that proposition. In the absence of a formal supranational political apparatus with decision- making sovereignty, the coordination of behaviour across countries seeking environmental improvements must take place through other forms of international cooperation: such as formal international treaties.

30 Effectiveness of IEAs Judging effectiveness of IEAs requires construction of a counter-factual – what would have happened anyway if the IEA had not been reached. Then, abatements achieved under an IEA can be compared with the counter-factual estimated abatement levels in the absence of the treaty. In other words, the test of effectiveness of agreements is by comparison of the Nash (non cooperative) and cooperative outcomes. By this criterion, the literature on IEAs suggests that they are likely to be very limited in their effectiveness.

31 Key results Three assertions about the effectiveness of IEAs seem to emerge from the theoretical literature, all of which imply somewhat pessimistic results: 1.Treaties tend to codify actions that nations were already taking. Or, put another way, they largely reflect what countries would have done anyway, and so offer little net improvement. 2.When the number of affected countries is very large, treaties can achieve very little, no matter how many signatories there are. 3.Cooperation can be hardest to obtain when it is needed the most.

32 Box 9.1 Conditions conducive to effective cooperation between nations in dealing with international environmental problems The existence of an international political institution with the authority and power to construct, administer and (if possible) enforce a collective agreement. The output of the international agreement would yield private rather than public goods. A large proportion of nation-specific or localised benefits relative to transnational benefits coming from the actions of participating countries. A small number of cooperating countries. Relatively high cultural similarity among the affected or negotiating parties. A substantial concentration of interests among the adversely affected parties. The adoption of a leadership role by one ‘important’ nation. Low uncertainty about the costs and benefits associated with resolving the problem. The agreement is self-enforcing. Continuous relationship between the parties. The existence of linked benefits. The short-run cost of implementation is low, and so current sacrifice is small. High proportion of the available benefits are obtained currently and in the near future. Costs of bargaining small relative to gains

33 Other factors conducive to international environmental cooperation Role of commitment an unconditional undertaking made by an agent about how it will act in the future, irrespective of what others do. credibility of commitments one interesting form of commitment is the use of performance bonds obtain the benefits of free-riding on the other’s pollution abatement. Transfers and side-payments e.g. signatories offer side-payments to induce non-signatories to enter Linkage benefits and costs and reciprocity may be possible to secure greater cooperation if other benefits are brought into consideration jointly. Doing this alters the pay-off matrix to the game. e.g. international trade restrictions, anti-terrorism measures, health and safety standards: may be economies of scope available by linking these various goals.

34 Figure 9.11 A one shot Prisoner’s Dilemma game B’s strategy A’s strategy DefectCooperate DefectP, PT, S CooperateS, TR,R

35 Figure 9.12 The two-shot Prisoner’s Dilemma game B’s strategy A’s strategy DefectCooperate Defect2P, 2PT+P, S+P CooperateS+P, T+PR+P,R+P

36 Are players only concerned with the returns that they get?

37 Global climate change: What determines Earth’s climate?

38 Figure 9.13 Estimate of the Earth’s annual and global mean energy balance Over the long term, the amount of incoming solar radiation absorbed by the Earth and atmosphere is balanced by the Earth and atmosphere releasing the same amount of outgoing longwave radiation. About half of the incoming solar radiation is absorbed by the Earth’s surface. This energy is transferred to the atmosphere by warming the air in contact with the surface (thermals), by evapotranspiration and by longwave radiation that is absorbed by clouds and greenhouse gases. The atmosphere in turn radiates longwave energy back to Earth as well as out to space. Source: FAQ 1.1, Figure 1.

39 How would GHG emissions and atmospheric concentrations change over the coming century and beyond if no additional controls were imposed?

40 Fig 9.14 Global GHG emissions (in GtCO 2 -eq per year) in the absence of additional climate policies. The figure shows six illustrative SRES marker scenarios (coloured lines) and 80th percentile range of recent scenarios published since SRES (post-SRES) (gray shaded area). Dashed lines show the full range of post- SRES scenarios. The emissions include CO 2, CH 4, N 2 O and F-gases. Source: Figure 3.1, IPCC AR4 Synthesis Report, available online at:

41 How will climate change over the coming century and beyond?

42 Figure 9.15 Multi model averages and assessed ranges for surface warming

43 Options available for mitigating GHG atmospheric concentrations There are two ways to move towards a goal of reducing the rate of growth of atmospheric greenhouse-gas concentrations: increase the capacity of sinks that sequester carbon dioxide and other greenhouse gases from the atmosphere; decrease emissions of greenhouse gases below business as usual (thereby reducing GHG inflows to the atmosphere).

44 The costs of attaining GHG emissions or atmospheric concentration targets: key results 1.The cost of achieving any given target in terms of levels of allowable GHG emissions or stabilised GHG concentrations increases as the magnitude of the emissions or concentration target declines. 2.Other things being equal, the cost of achieving any given target increases the higher are baseline (i.e. uncontrolled) emissions over the time period in question. 3.The cost of achieving any given target varies with the date at which targets are to be met, but does so in quite complex ways. It is not possible to say in general whether fast or early control measures are more cost-effective than slow or late controls.

45 More key results 4.There is some scope for GHG emissions to be reduced at zero or negative net social cost. The magnitude of this is uncertain. It depends primarily on the size of three kinds of opportunities and the extent to which the barriers limiting their exploitation can be overcome: –overcoming market imperfections (and so reducing avoidable inefficiencies); –ancillary or joint benefits of GHG abatement (such as reductions in traffic congestion); –double dividend effects

46 More key results (2) 5.Abatement costs will be lower the more cost-efficiently that abatement is obtained. This implies several things: –Costs will be lower for strategies that focus on all GHGs, rather than just CO 2, and are able to find cost- minimising abatement mixes among the set of GHGs. It is not just carbon emissions or concentrations that matter. –Costs will be lower for strategies that focus on all sectors, rather than just one sector or a small number of sectors. Thus, for example, while reducing emissions in energy production is of great importance, the equi- marginal principle suggests that cost minimisation would require a balanced multi-sectoral approach. –The more ‘complete’ is the abatement effort in terms of countries involved, the lower will be overall control costs. This is just another implication of the equi-marginal cost principle, and it also is necessary to minimise problems of carbon (or other GHG) leakage. –The above comments imply that in principle achieving targets at least cost could be brought about by the use of a set of uniform global GHG taxes. Alternatively, use could be made of a set of freely tradeable net emissions licenses (one set for each gas, with tradability between sets at appropriate conversion rates), with quantities of licenses being fixed at the desired cost-minimising target levels. 6.Climate-change decision-making is essentially a sequential process under uncertainty. The value of new information is likely to be very high, and so there are important quasi-option values that should be considered.

47 Figure 9.16 Global GHG emissions for 2000 and projected baseline emissions for 2030 and 2100 from IPCC SRES and the post-SRES literature The figure provides the emissions from the six illustrative SRES scenarios. It also provides the frequency distribution of the emissions in the post-SRES scenarios (5th, 25th, median, 75th, 95th percentile), as covered in Chapter 3. F-gases cover HFCs, PFCs and SF6.

48 Numerical estimates of mitigation potential and mitigation costs Short to medium term GHG mitigation: estimated mitigation costs for the period to 2030


50 Long term GHG mitigation, for stabilised GHG concentrations: estimated mitigation costs for the period after 2050

51 Figure 9.17

52 Fig 9.17 (alt version)

53 Figure 9.17 Emissions pathways of mitigation scenarios for alternative groups of stabilization targets Accompanying text: The pink area gives the projected CO 2 emissions for the recent mitigation scenarios developed post- TAR. Green shaded areas depict the range of more than 80 TAR stabilization scenarios (Morita et al., 2001). Category I and II scenarios explore stabilization targets below the lowest target of the TAR. Source: IPCC (2007), WGIII. (Based on Nakicenovic et al., 2006, and Hanaoka et al., 2006)

54 Nordhaus DICE-2007 model An intertemporal optimisation model of climate change policy. Objective function in DICE-2007 is the present value of global consumption. Damages from GHG emissions reduce consumption possibilities, as do the costs of GHG abatement. Model allows the user to identify emissions abatement choices (the policy instruments) that maximise the present value of global consumption, net of GHG damages and abatement costs, over horizons of up to 200 years or so ahead. Nordhaus calls such a set of policy choices the ‘optimal’ policy.

55 Table 9.11: Results of DICE-2007 simulations

56 (2005 U.S. dollars per ton of carbon) Figure 9.18 The level of carbon prices (or taxes) through time for various mitigation strategies

57 Safe minimum standard (precautionary) approaches. The large uncertainties which exist in climate change modelling regarding the damages that climate change could bring about lead many to conclude that mitigation policy should be based on a precautionary principle. This would entail that some ‘safe’ threshold level of allowable climate change is imposed as a constraint on admissible policy choices. Support for a safe minimum standard approach in the climate change context has grown in recent years for two main reasons. –First, the science increasingly points to non-linearities in the dose-response function linking temperature change to induced damages, with damages rising at increasingly large marginal rates at higher levels of global mean temperatures, and possibly discontinuously. –Secondly, positive feedbacks in the linkage between GHG concentration rates and temperature responses are increasingly likely to kick-in as atmospheric GHG concentrations rise, so that the climate sensitivity coefficients rise endogenously.

58 Figure 9.19

59 The Kyoto Protocol Attempts to secure internationally coordinated reductions in GHG emissions have taken place largely through a series of international conventions organised under the auspices of the United Nations ‘Earth Summit’: Framework Convention on Climate Change (FCCC) was adopted, requiring signatories to conduct national inventories of GHG emissions and to submit action plans for controlling emissions. By 1995, parties to the FCCC had established two significant principles: emissions reductions would initially only be required of industrialised countries; second, those countries would need to reduce emissions to below 1990 levels.

60 The Kyoto Protocol (2) Kyoto Protocol: the first substantial agreement to set country-specific GHG emissions limits and a timetable for their attainment. To come into force and be binding on all signatories, the Protocol would need to be ratified by at least 55 countries, responsible for at least 55% of 1990 CO2 emissions of FCCC ‘Annex 1’ nations. The key objective set by the Protocol was to cut combined emissions of five principal GHGs from industrialised countries by 5% relative to 1990 levels by the period 2008–2012. The Protocol did not set any binding commitments on developing countries.

61 Subsequent activity Since 1997, there have been annual meetings of the parties that signed the Kyoto Protocol. Initially, those meetings were largely concerned with the institutional structures and mechanisms and ‘rules of the game’ required to implement the protocol, such as how emissions and reductions are to be measured, the extent to which CO2 absorbed by sinks will be counted towards Kyoto targets, and compliance mechanisms. The twin conditions required for the Protocol to become operational were met in early While the Kyoto Protocol came into force at that time, it did so without the participation of the USA, thereby significantly weakening its potential impact. The first phase of the Kyoto Protocol will end in Recent meetings of the parties have been concerned with making preparations for its second phase.

62 The Kyoto Protocol’s flexibility mechanisms These generate incentives for control to take place in sources that have the lowest abatement costs, and so create the potential for greatly reducing the total cost of attaining any given overall policy target. –Emissions Trading: Allows emissions trading among Annex 1 countries; countries in which emissions are below their allowed targets may sell ‘credits’ to other nations, which can add these to their allowed targets. –Banking Emissions targets do not have to be met every year, only on average over the period 2008–2012. Moreover, emissions reductions above Kyoto targets attained in the years 2008–2012 can be banked for credit in the following control period. –Joint Implementation: JI allows for bilateral bargains among Annex 1 countries, whereby one country can obtain ‘Emissions Reduction Units’ for undertaking in another country projects that reduce net emissions, provided that the reduction is additional to what would have taken place anyway. –Clean Development Mechanism: By funding projects that reduce emissions in developing countries, Annex 1 countries can gain emissions credits to offset against their abatement obligations. Effectively, the CDM generalises the JI provision to a global basis. The CDM applies to sequestration schemes (such as forestry programmes) as well as emissions reductions.

63 The Kyoto Protocol’s flexibility mechanisms Problems: validation of project additionality. Kyoto’s flexibility mechanisms appear to offer very large prospects of reductions in overall emissions abatement costs. Studies carried out during the 1990s found median marginal abatement costs in developed economies to be of the order of $200 per tonne of carbon. Barrett (1998) argued that with emissions being uncontrolled in the non- Annex 1 countries, marginal abatement costs there are effectively zero. On this basis, he suggests that cost savings from the Clean Development Mechanism alone could be of the order of $200/tC at the margin.

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