I am spending the next week in Beijing attending the Beijing Forum while staying at one of the oldest - and best - academic institutions in China, Peking University. On Sunday I am presenting a paper ‘Strategic Issues in Global Climate Change Policy: an Economic Perspective’. This paper uses game theory to analyse the strategic interactions between the greenhouse gas emission (GGE) policies of large countries such as the US and China accounting both for policy spill-overs and carbon leakages (gains and losses that result when some countries control GGEs and others do not).
I argue that incentive issues associated with gaining international cooperation are intensified by the existence of carbon leakages but that side-policies (such as border taxes) in conjunction with adopting the correct consumption-based accounting framework can offset the effects of leakages. Unfortunately there are a host of practical and GATT-illegality obstacles to implementing border taxes. The types of incentive problems that do arise can sometimes be resolved by rich countries compensating poor countries and then mitigating by transferring resources from points where mitigation is highly valued to points where mitigation is cheapest. This accords with ‘public goods’ principles. ‘Embarrassment effects’ – experienced if isolated countries who do not mitigate suffer psychic costs – also convert intractable Prisoner Dilemma games into more tractable Assurance games that can be resolved by simple commitments. Penalties imposed on non-mitigators can be direct, when they are relatively ineffectual, or indirect and more effectual. I discuss the approach by Gersbach (2008) for the establishment of a Global Refunding System into which the carbon taxes of the world are paid. Countries get rebates depending on the effectiveness of their policies and are effectively penalised if they do not mitigate enough. This is an option worth exploring.
In a multi (more than 2) country setting, having an extra country mitigate has the ‘moral suasion’ effect of reducing potential carbon leakage losses faced by current non-mitigators if they should choose to mitigate. But offsetting this, the countries which hold out and are the last to mitigate get carbon leakage gains from those who do. Overall the case for progressive moral suasion is unpersuasive.
Intermediate or ‘no regrets’ policies – such as those offered by China – do provide ‘moral suasion’ arguments for cooperation simply by reducing to some extent possible carbon leakages. Again they only diminish to a small degree the benefits expected if a country holds out as a non-mitigator.
Dynamising these policy tasks faces issues of modelling arbitrariness. It is easy to come up with a number of dynamic and repeated game models which capture various features of the issues but certainly not the whole story. I keep falling back on the simple idea that (with numerous qualifications) the US has a good deal of strategic power in the present situation because it is better equipped to adapt to climate change and facers lower adjustment costs anyway than does a country like China. I am working on these issues further with colleagues in Melbourne particularly with respect to using behavioural economics insights.
Generally I am very interested in China and its climate change policies which have attained a high priority in Chinese policy thinking. I am interested in learning what I can during my brief Chinese visit. There are a large number of policies – oriented toward adaptation and ‘no regrets’ options such as energy conservation which address climate change issues with serious intent.