Lecture 9-11 Intergenerational Fairness Fall 2024 PDF

The theory of International Environmental Agreements Intergenerational Fairness Fall 2024, Lecture X Paolo G. Piacquadio1 1 FGN-HSG...

The theory of International Environmental Agreements Intergenerational Fairness Fall 2024, Lecture X Paolo G. Piacquadio1 1 FGN-HSG November 28, 2024 Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results IEAs Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results Research questions International Environmental Agreements (IEAs) are a natural way to address the problem of climate change a healthy environment is a global public good; participation to such agreements is itself a public good; binding agreements help overcome the free-riding problem. Questions: How do IEAs work? What type of agreements work? How to best design an IEA? Kolstad and Toman (2005) summarize the literature as the “Paradox of International Agreements:” while IEAs seem to be ubiquitous, economic theory suggest that they should not exist, or at least, they should not be effective in the form in which they are observed. Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results Research questions International Environmental Agreements (IEAs) are a natural way to address the problem of climate change a healthy environment is a global public good; participation to such agreements is itself a public good; binding agreements help overcome the free-riding problem. Questions: How do IEAs work? What type of agreements work? How to best design an IEA? Kolstad and Toman (2005) summarize the literature as the “Paradox of International Agreements:” while IEAs seem to be ubiquitous, economic theory suggest that they should not exist, or at least, they should not be effective in the form in which they are observed. Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results Research questions International Environmental Agreements (IEAs) are a natural way to address the problem of climate change a healthy environment is a global public good; participation to such agreements is itself a public good; binding agreements help overcome the free-riding problem. Questions: How do IEAs work? What type of agreements work? How to best design an IEA? Kolstad and Toman (2005) summarize the literature as the “Paradox of International Agreements:” while IEAs seem to be ubiquitous, economic theory suggest that they should not exist, or at least, they should not be effective in the form in which they are observed. Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results Theoretical framework The standard tool to think about IEAs is non-cooperative game theory of coalition formation. It constists of two stages: in the first stage -- the coalition game -- they decide non cooperatively whether or not to sign the agreement (defining the burden-sharing rule); in the second stage – the emission game – they play the non cooperative Nash emission game, where the countries which sign the agreement play as a single player and divide the resulting payoff according to a given burden-sharing rule. For simplicity (but not without loss of generality), let us assume that all countries decide simultaneously in both stages. Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results Theoretical framework The standard tool to think about IEAs is non-cooperative game theory of coalition formation. It constists of two stages: in the first stage -- the coalition game -- they decide non cooperatively whether or not to sign the agreement (defining the burden-sharing rule); in the second stage – the emission game – they play the non cooperative Nash emission game, where the countries which sign the agreement play as a single player and divide the resulting payoff according to a given burden-sharing rule. For simplicity (but not without loss of generality), let us assume that all countries decide simultaneously in both stages. Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results Theoretical framework The standard tool to think about IEAs is non-cooperative game theory of coalition formation. It constists of two stages: in the first stage -- the coalition game -- they decide non cooperatively whether or not to sign the agreement (defining the burden-sharing rule); in the second stage – the emission game – they play the non cooperative Nash emission game, where the countries which sign the agreement play as a single player and divide the resulting payoff according to a given burden-sharing rule. For simplicity (but not without loss of generality), let us assume that all countries decide simultaneously in both stages. Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results Theoretical framework: the emission game During the coalition game, countries anticipate the play and outcome of the emission game. Thus, countries reason by backward induction and solve the emission game for each possible coalition. Here, we do not need to specify the exact payoff structure of coalition members and non-coalition members. The key assumption is that each country’s payoff increases with the coalition size (number of signatories). Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results Theoretical framework: the emission game During the coalition game, countries anticipate the play and outcome of the emission game. Thus, countries reason by backward induction and solve the emission game for each possible coalition. Here, we do not need to specify the exact payoff structure of coalition members and non-coalition members. The key assumption is that each country’s payoff increases with the coalition size (number of signatories). Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results Theoretical framework: the emission game During the coalition game, countries anticipate the play and outcome of the emission game. Thus, countries reason by backward induction and solve the emission game for each possible coalition. Here, we do not need to specify the exact payoff structure of coalition members and non-coalition members. The key assumption is that each country’s payoff increases with the coalition size (number of signatories). Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results Theoretical framework: the emission game During the coalition game, countries anticipate the play and outcome of the emission game. Thus, countries reason by backward induction and solve the emission game for each possible coalition. Here, we do not need to specify the exact payoff structure of coalition members and non-coalition members. The key assumption is that each country’s payoff increases with the coalition size (number of signatories). Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results Theoretical framework: coalition game (1) Countries are all identical. All countries are proposed to sign a single agreement; If they sign the agreement, they cannot propose a different agreement. As a result, there can only be one coalition. All those who do not sign (or defect) play as a singleton. When defecting from a coalition S, each country assumes that the other countries belonging to S remain in the coalition. Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results Theoretical framework: coalition game (1) Countries are all identical. All countries are proposed to sign a single agreement; If they sign the agreement, they cannot propose a different agreement. As a result, there can only be one coalition. All those who do not sign (or defect) play as a singleton. When defecting from a coalition S, each country assumes that the other countries belonging to S remain in the coalition. Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results Theoretical framework: coalition game (1) Countries are all identical. All countries are proposed to sign a single agreement; If they sign the agreement, they cannot propose a different agreement. As a result, there can only be one coalition. All those who do not sign (or defect) play as a singleton. When defecting from a coalition S, each country assumes that the other countries belonging to S remain in the coalition. Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results Theoretical framework: coalition game (1) Countries are all identical. All countries are proposed to sign a single agreement; If they sign the agreement, they cannot propose a different agreement. As a result, there can only be one coalition. All those who do not sign (or defect) play as a singleton. When defecting from a coalition S, each country assumes that the other countries belonging to S remain in the coalition. Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results Theoretical framework: coalition game (2) A coalition S is profitable if each country i ∈ S gains from joining the coalition (as opposed to no coalition): Pi (S) ≥ Pi (∅) for each i ∈ S. A coalition S is stable if no country i ∈ S gains from leaving the coalition: Pi (S\i) > Pi (S) for each i ∈ S; no other country i ̸∈ S wants to join the coalition: ! " # Pi S i > Pi (S) for each i ̸∈ S; A profitable and stable coalition S is also Pareto optimal if there exists no other profitable and stable coalition that makes everyone better off. Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results Theoretical framework: coalition game (2) A coalition S is profitable if each country i ∈ S gains from joining the coalition (as opposed to no coalition): Pi (S) ≥ Pi (∅) for each i ∈ S. A coalition S is stable if no country i ∈ S gains from leaving the coalition: Pi (S\i) > Pi (S) for each i ∈ S; no other country i ̸∈ S wants to join the coalition: ! " # Pi S i > Pi (S) for each i ̸∈ S; A profitable and stable coalition S is also Pareto optimal if there exists no other profitable and stable coalition that makes everyone better off. Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results Theoretical framework: coalition game (2) A coalition S is profitable if each country i ∈ S gains from joining the coalition (as opposed to no coalition): Pi (S) ≥ Pi (∅) for each i ∈ S. A coalition S is stable if no country i ∈ S gains from leaving the coalition: Pi (S\i) > Pi (S) for each i ∈ S; no other country i ̸∈ S wants to join the coalition: ! " # Pi S i > Pi (S) for each i ̸∈ S; A profitable and stable coalition S is also Pareto optimal if there exists no other profitable and stable coalition that makes everyone better off. Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results Partial cooperation Surprisingly, this is not a prisoner’s dilemma setting. It is more similar to a “chicken game”. As a result, the equilibrium of the game is not the one in which no cooperation takes place (no country signs the agreement). The equilibrium of the game is one where a profitable and stable, but partial, coalition emerges out of the two stage-game. At the equilibrium, there are two groups of countries: signatories and defectors. The size of the group of signatories crucially depends on the strategic interaction between countries (slope of the reaction functions). Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results Partial cooperation Surprisingly, this is not a prisoner’s dilemma setting. It is more similar to a “chicken game”. As a result, the equilibrium of the game is not the one in which no cooperation takes place (no country signs the agreement). The equilibrium of the game is one where a profitable and stable, but partial, coalition emerges out of the two stage-game. At the equilibrium, there are two groups of countries: signatories and defectors. The size of the group of signatories crucially depends on the strategic interaction between countries (slope of the reaction functions). Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results Partial cooperation Surprisingly, this is not a prisoner’s dilemma setting. It is more similar to a “chicken game”. As a result, the equilibrium of the game is not the one in which no cooperation takes place (no country signs the agreement). The equilibrium of the game is one where a profitable and stable, but partial, coalition emerges out of the two stage-game. At the equilibrium, there are two groups of countries: signatories and defectors. The size of the group of signatories crucially depends on the strategic interaction between countries (slope of the reaction functions). Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results Small coalitions: other policies? The equilibrium coalition is generally formed by a low number of signatories. Research has thus focused on ways to extend the size of the coalition, by introducing appropriate policy measures that go beyond emission controls. Three main directions have been explored: transfers; issue linkages; threats. Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results Small coalitions: other policies? The equilibrium coalition is generally formed by a low number of signatories. Research has thus focused on ways to extend the size of the coalition, by introducing appropriate policy measures that go beyond emission controls. Three main directions have been explored: transfers; issue linkages; threats. Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results Small coalitions: other policies? The equilibrium coalition is generally formed by a low number of signatories. Research has thus focused on ways to extend the size of the coalition, by introducing appropriate policy measures that go beyond emission controls. Three main directions have been explored: transfers; issue linkages; threats. Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results IEAs with transfers Transfers are often proposed to tackle the profitability dimension of international negotiations, i.e., to compensate those countries that would lose from signing the agreement. Transfers may also be an important tool to expand an originally stable, but small, environmental coalition. However, as shown in Carraro and Siniscalco (1993), countries which accept to implement a transfer program to non-signatories must be committed to cooperation. Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results IEAs with transfers Transfers are often proposed to tackle the profitability dimension of international negotiations, i.e., to compensate those countries that would lose from signing the agreement. Transfers may also be an important tool to expand an originally stable, but small, environmental coalition. However, as shown in Carraro and Siniscalco (1993), countries which accept to implement a transfer program to non-signatories must be committed to cooperation. Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results IEAs with transfers Transfers are often proposed to tackle the profitability dimension of international negotiations, i.e., to compensate those countries that would lose from signing the agreement. Transfers may also be an important tool to expand an originally stable, but small, environmental coalition. However, as shown in Carraro and Siniscalco (1993), countries which accept to implement a transfer program to non-signatories must be committed to cooperation. Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results IEAs with issue linkages The linkage of environmental negotiations to other economic issues (e.g. trade, technological cooperation) may be useful: (a) to reduce the constraints that asymmetries impose on the emergence of stable environmental agreements; (b) to increase the size of the stable coalition. By including (excludable) benefits in the negotiation, the effect is similar to transfers and helps to offset the free-riding incentives of countries. An example is the linkage of environmental negotiations with negotiations on technological cooperation: this works since signatories can share the benefits from innovation,...... with minor spillovers to non-signatories (Carraro and Siniscalco, 1997). Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results IEAs with issue linkages The linkage of environmental negotiations to other economic issues (e.g. trade, technological cooperation) may be useful: (a) to reduce the constraints that asymmetries impose on the emergence of stable environmental agreements; (b) to increase the size of the stable coalition. By including (excludable) benefits in the negotiation, the effect is similar to transfers and helps to offset the free-riding incentives of countries. An example is the linkage of environmental negotiations with negotiations on technological cooperation: this works since signatories can share the benefits from innovation,...... with minor spillovers to non-signatories (Carraro and Siniscalco, 1997). Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results IEAs with issue linkages The linkage of environmental negotiations to other economic issues (e.g. trade, technological cooperation) may be useful: (a) to reduce the constraints that asymmetries impose on the emergence of stable environmental agreements; (b) to increase the size of the stable coalition. By including (excludable) benefits in the negotiation, the effect is similar to transfers and helps to offset the free-riding incentives of countries. An example is the linkage of environmental negotiations with negotiations on technological cooperation: this works since signatories can share the benefits from innovation,...... with minor spillovers to non-signatories (Carraro and Siniscalco, 1997). Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results IEAs with threats Threat of economic sanctions (i.e., trade) can also be used to punish non-signatories and, thus, increase the number of signatories. However, credible threats are difficult to design. Emissions themselves are hardly a credible threat, because countries are unlikely to sustain self-damaging policies. Moreover, the prospect of carrying out sanctions (to attract signatories) might actually reduce the incentive to join the coalition of current signatories. Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results IEAs with threats Threat of economic sanctions (i.e., trade) can also be used to punish non-signatories and, thus, increase the number of signatories. However, credible threats are difficult to design. Emissions themselves are hardly a credible threat, because countries are unlikely to sustain self-damaging policies. Moreover, the prospect of carrying out sanctions (to attract signatories) might actually reduce the incentive to join the coalition of current signatories. Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results IEAs with threats Threat of economic sanctions (i.e., trade) can also be used to punish non-signatories and, thus, increase the number of signatories. However, credible threats are difficult to design. Emissions themselves are hardly a credible threat, because countries are unlikely to sustain self-damaging policies. Moreover, the prospect of carrying out sanctions (to attract signatories) might actually reduce the incentive to join the coalition of current signatories. Paolo G. Piacquadio Intergenerational Fairness  Introduction The theory of International Environmental Agreements Theoretical framework Main results Thank you! Paolo G. Piacquadio Intergenerational Fairness