Thursday, June 12, 2008

Cooperation in climate change negotiations

For certain types of national payoffs the problem of engineering a cooperative agreement among nations to achieve good greenhouse gas controls can have the structure of a Prisoner’s Dilemma. The welfare of all countries is maximised if they all agree to mitigate their emissions but each country has incentives to ‘free ride’ on mitigation agreements. This reflects the ‘public bad’ character of greenhouse gas emissions and the prospects for gains through carbon leakage (the setting up of carbon emitting industries) in countries that don’t mitigate.

I have been studying this issue using game theory. One issue I have focused on is whether getting an additional country to mitigate improves the prospects for negotiating a global agreement or not. When does some element of ‘moral suasion’ work in driving further countries to mitigate?

It isn’t as easy an issue as it looks. When an extra country mitigates the possibility of losing business to that country via carbon leakage falls and this improves - perhaps only marginally – the prospects for other countries to mitigate since their industries can now leak away to a smaller subset of non-mitigating countries. But the local gains from mitigation must still exceed the presumably large gains a country would receive when it alone does not mitigate but gets carbon leakage benefits from all the countries which do.

But, for the dominant strategy to be mitigation, local gains from mitigation now do not need to exceed the presumably huge costs of going it alone in mitigating since the pool of potential carbon leakage losses has fallen as other countries commit to mitigating. These improvements in the prospects for avoiding Prisoner’s Dilemma issues improve the greater the potential reduction in carbon leakage losses that follows commitments to mitigate.

Thus if a developing country like China were to commit to mitigation, and to thereby rule out extensive carbon leakage losses for developed countries if they mitigated, then the improvements in the prospects for cooperation are enhanced. If a small country or an already developed country – such as Australia - mitigated then the case for other developed countries to mitigate in response would be relatively weaker.

These ambiguous prospects for enhanced global cooperation can be re-examined in repeated or dynamic game settings - I have done this and will discuss these results in further posts. This work can be adapted to account for asymmetries in national interests and for the possibility of repeated negotiations.

But an alternative approach draws on behavioural economics and examines the conditions under which agents cooperate even though it is not in their individual self-interest to do so (I recently came across this interesting paper by Brekke and Johansson-Stenman (2008) which takes this approach).

Laboratory experiments suggest that people are willing to cooperate if they see others doing so. Moreover, field evidence suggests that people’s willingness to contribute to good social causes increases with their perception of the contribution of others. These are instances of conditional cooperation. There is also much laboratory evidence consistent with reciprocity – this is a social norm that motivates people to reward kind and to punish unkind actions towards them. This reciprocity is not conditional on gaining some long-term reward and can even occur in one-shot interactions. Intentions of kindness or unkindness matter as well as consequences of actions.

These observations relate to individuals rather than countries interacting in a multi-country setting. A key issue then is whether or not agents become more or less cooperative in a group situation. Unfortunately the experimental evidence here goes both ways - sometimes groups behave more cooperatively than individuals and other times less so.

Behavioural economics also provides evidence of self-serving biases. When facts and principles are ambiguous we tend to choose those which favour our self-interest. Even if people are motivated by ‘fairness’ their world view as to what delivers fairness is likely to converge toward views that serve their own self-interest. For example, policy-makers in rich countries may simply seek to avoid ethical discussions involving the needs of energy-poor developing countries and climate change because entering into this discussion with them might induce the discomfit of guilt. Cognitive dissonance may also be a factor. Countries which release large volumes of GGEs may change their beliefs to fit their behaviour by coming to believe that the damages of GGEs are overstated.

These behavioural perspectives provide new ways of thinking about enhancing the prospects for greenhouse gas control. To quote Brekke and Johansson-Stenman:

First, people, and also countries, are able to make decisions that are not in their own material interest if they have other sufficiently strong reasons for doing so, such as obtaining a situation that is overall socially desirable and if this can be obtained in a way that is perceived as reasonably fair. Second, when individual parties analyse what a fair outcome should look like they are typically influenced by self-serving bias, and this makes it more difficult to reach agreements. Third, negotiating parties are likely to avoid looking at information that would force them to reflect over ethical issues. A potential policy implication is therefore to emphasise such information to the point where it is impossible for the negotiators to ignore it. Fourth, the possibility to use sanctions and punishments seems essential for the longer term effectiveness of a climate agreement. The Kyoto protocol and the forecasts for the next agreement currently lack this opportunity….see also Stiglitz (2006) for a suggestion of linking the climate and trade negotiations, leading to countries that fail to act responsibly in the climate area being punished by tolls’.


Spiros said...

I reckon, Harry, that lessons can be learned from the way you academics co-operate (or not). As a professor, no one can force your co-operation on departmental stuff, but presumably you do (up to a point) as do your senior colleagues, even though you individually might be better off in some sense by telling everyone to get stuffed. (Less time on committees = more time for research).

So what makes you co-operate?

sexy said...