10.2.2 Coalition Formation
If the goal is to understand which international regime is likely to emerge
to control GHG emissions, game theory is certainly the best tool. Indeed, game
theory has been used extensively to analyze the possibility of coalition formation
in the presence of free riding (i.e., when parties have to agree on the provision
of a public good). Early contributions (see Hardin and Baden, 1977) characterized
the environmental game among countries as a prisoners’ dilemma, inevitably
leading to the so-called “tragedy” of the common property goods. However,
in the real world, at the same time, many international environmental agreements
on the commons were signed, often involving subgroups of negotiating countries
and sometimes involving economic and technological transfers and other links
to other policies (trade, technological co-operation, etc.). It was therefore
necessary to develop new models to help understand the logic of coalition formation
in the presence of spillovers, and the possibility to increase welfare by means
of appropriate mechanisms and strategies. These new models were developed in
the 1990s within a non-co-operative game-theory framework, and provide interesting
indications on the likely outcomes of climate negotiations.
Consider first the case in which countries negotiate on a single worldwide
agreement. Most papers in the game-theory literature on coalition formation
applied to environmental agreements (Hoel, 1991, 1992; Carraro and Siniscalco,
1992, 1993; Barrett, 1994, 1997b; Heal, 1994; Parson and Zeckhauser, 1995) propose
the following conclusions:
- the presence of asymmetries7
across countries and the incentive to free-ride makes the existence of global
self-enforcing agreements, that is agreements which are profitable to all
signatories and stable, quite unlikely (Carraro and Siniscalco, 1993);
- when self-enforcing international environmental agreements exist, they are
signed by a limited number of countries (Hoel, 1991, 1994; Carraro and Siniscalco,
1992; Barrett, 1994); and
- when the number of signatories is large, the difference between the co-operative
behaviour adopted by the coalition and the non-co-operative one is very small
(Barrett, 1997b; Hammitt and Adams, 1996).
The results are robust with respect to different specifications of countries’
welfare function, and with respect to the burden-sharing rule8
used in the asymmetric case (Barrett, 1997a; Botteon and Carraro, 1997a). They
suggest that the attempt to negotiate effective emission reductions is unlikely
to lead to a coalition formed by all or by almost all countries, unless more
complex policy strategies, in which environmental policy interacts with other
policy measures, are adopted9.
This is why in the game-theoretic environmental economics literature two main
sets of instruments are proposed to expand environmental coalitions, that is
to increase the number of signatories of an environmental agreement. These instruments
are “economic and technological transfers” and “issue linkage”.
The potential of these instruments is analyzed in Section
10.2.5, which deals with partial agreements and ways to broaden them.
Consider the case in which countries are free to sign the agreement proposed
by a group of countries or to propose themselves a different agreement to the
same or to other countries (Carraro, 1998). This may lead to the formation of
multiple climate agreements, as happens with trade blocs (Bloch, 1997; Yi, 1997;
Carraro and Moriconi, 1998). The multiplicity of coalitions may allow region-specific
agreements in which the characteristics of countries in the region are better
reflected by the contents of the agreement. Even in this case, game theory provides
a clear analysis of the outcome of climate negotiations. Despite the large number
of equilibrium concepts10,
some conclusions seem to be quite robust:
- the equilibrium coalition structure is not formed by a single coalition,
but usually by many coalitions;
- the grand coalition, in which all countries sign the same environmental
agreement, is unlikely to be in equilibrium; and
- coalitions of different sizes may emerge at the equilibrium (even when countries
are symmetric).
The specific results on the size of the coalitions depend on the model structure
and, in particular, on the slope of countries’ reaction functions (i.e.,
on the presence of carbon leakage). If there is no or little leakage and countries
are symmetric, then the Nash equilibrium of the multicoalition game is characterized
by many small coalitions, each one satisfying the properties of internal and
external stability (this result is shown in Carraro and Moriconi, 1998).
The remaining question is therefore a policy one. Is a country’s welfare
larger when one or when several coalitions form? And what happens with environmental
effectiveness? The answer is still uncertain, both because theory provides examples
in which a single agreement is preferred, at least from an environmental viewpoint,
to many small regional agreements (and vice versa), and because empirical studies
have not yet convincingly addressed this issue. Moreover, the conclusion crucially
depends on the choice of the equilibrium concept and on the size of leakage.
The consequence of the results discussed above is that the structure of the
international environmental agreements is a crucial dimension of the negotiating
process. If all countries negotiate on a single agreement, the incentives to
sign are lower than those that characterize a multiple-agreement negotiating
process. But at the equilibrium, the environmental benefit (quality) may be
higher.
Can more precise conclusions be made on the likely coalition(s) that can emerge
at the equilibrium? Can existing studies be used, albeit not in their design,
to address the above issues, and to increase our understanding of the implications
of different policy strategies? In the next section, the aim is to provide,
at least partially, a synthesis, by exploring the outcomes of the combinations
of different coalition structures (international regimes) and of different policy
options (with focus on different degrees of adoption of emissions trading and
other Kyoto mechanisms). Table 10.2 summarizes the main
combinations for which impact is explored. The papers indicated in each cell
are examples and do not cover the literature in total.
| Table 10.2: Coalition structures and policy options
|
|
|
| |
Policy options |
|
| |
|
Domestic measures only |
Co-ordinated carbon tax |
Flexibility mechanisms with ceilings |
Free flexibility mechanisms |
Flexibility mechanisms with banking |
Flexibility mechanisms with R&D |
Flexibility mechanisms with
monopoly power |
|
|
C
o
a
l
i
t
i
o
n
s
t
r
u
c
t
u
r
e
s
|
No participation |
IPCC (1995)
|
|
|
|
|
|
|
| Unilateral participation |
Jorgensen et al. (1993)
Barrett (1992)
|
|
|
|
|
|
|
| EU only |
Carraro and Siniscalco (1992)
|
Bosello and Carraro (1999) Barker
(1999)
|
|
|
|
|
|
| OECD only |
Burniaux et al. (1992)
|
Capros (1998)
|
|
Harrison and Rutherford (1999)
Holtsmark (1998)
Capros (1998)
|
|
|
|
| Annex-1 countries |
McKibbin et al. (1998)
|
Mensbrugghe (1998)
Buonnano
|
Ellerman et al. (1998)
Holtsmark (1998)
et al. (1999)
Manne and Richels (1998)
|
Ellerman et al.(1998)
Grubb and Vrolijk (1998)
Westkog (1999)
McKibbin et al. (1998)
Manne and Richels (1999a, 1999b)
Mensbrugghe (1998)
Nordhaus and Boyer (1999)
Shackleton (1998)
|
Bosello and Roson (1999)
(1999)
|
Nordhaus (1997)
Buonnano et al.
|
Burniaux (1998)
Ellerman et al. (1998)
|
| Double umbrella |
|
|
|
McKibbin et al. (1998)
Shackleton (1998)
|
|
|
Ellerman et al.(1998)
|
| All countries |
Nordhaus and Yang (1996)
|
|
Ellerman et al. (1998)
Buonnano et al. (1999)
|
Bohm (1999)
Ellerman et al. (1998)
Manne and Richels (1998; 1999a, 1999b)
Nordhaus and Boyer (1999)
Shackleton (1998)
|
Bosello and Roson (1998)
Westkog (1999)
|
Nordhaus (1997)
Buonnano et al. (1999)
|
|
|
