Conference Agenda

Addressing environmental damage heterogeneity, this paper uses a three-country static model of environmental cooperation with trade to analyze the feasibility and stability of partial and global International Environmental Agreements (IEAs) among heterogeneous countries. Strong incentives to free ride and difficulties in enforcing international environmental agreements make international cooperation a challenging task. With international trade, governments face the tradeoff of higher taxes to cooperatively reduce emissions or higher tariffs on exports when acting noncooperatively. Diamantoudi et al. (2018a) found that stable coalitions among homogeneous countries are larger and provide more significant welfare gains than the basic model without trade. The paper's objectives, therefore, are: (i) to determine whether environmental cooperation among countries with different environmental damage parameters provides environmental gains, overall welfare gains, or both, (ii) to identify which cooperative scenarios will emerge in a stable environmental coalition to exploit these gains, and (iii) to capture the effect of heterogeneity in environmental damages on the stability and success of such environmental coalitions.

The model assumes that each country has a single firm producing an emission-intensive homogeneous good, which results in an equal number of transboundary emissions such as carbon dioxide. In stage one, each country chooses its coalition membership. A coalition is deemed stable if no firm has an incentive to either enter or exit the coalition (D'Aspremont et al. 1983). In stage two, each country determines the optimal emissions tax rate and import tariff that maximize the coalition's welfare. In stage three, each firm chooses non-cooperatively its production rate to maximize its own profits. Firms compete à la Cournot in a segmented market with positive endogenous import tariffs rather than in a free trade setting. The three-stage static coalition formation game is solved by backward induction.

The numerical simulation demonstrates that the grand coalition is stable at varying levels of environmental damage heterogeneity. When market sizes are sufficiently small, the grand coalition leads to both environmental and overall welfare gains. However, as market sizes grow sufficiently larger, the grand coalition only yields overall welfare gains. Consequently, this research provides evidence that the coordination of environmental and trade policies can be a valuable strategy to reduce global emissions in sufficiently small markets, even when countries exhibit heterogeneity in their environmental damages.

We introduce a novel climate coalition formation game in continuous time. The model makes the negotiation process during which countries join the coalition explicit. This yields a more realistic description of actual negotiations than previous models, and offers a resolution to the so-called "Paradox of International Agreements'' (Kolstad and Toman 2005), according to which climate cooperation fails to deliver substantial welfare gains when countries' participation decisions are voluntary. We argue that this paradox builds on an overly restrictive framework where all participation decisions are taken simultaneously. In our model, countries are free to decide whether and when to join the coalition. This allows for the formation of large coalitions, including the grand coalition, in equilibrium. Using mixed strategies, our model also offers an explanation for delays in climate negotiations, as well as for their possible failure on the equilibrium path.

A significant challenge in climate change negotiations consists of establishing a burden-sharing scheme (or effort-sharing scheme) that all or most governments find fair. Two key fairness principles are emphasized by the United Nations Framework Convention on Climate Change (UNFCCC) in allocating mitigation efforts: the Polluter Pays principle (``common but differentiated responsibilities''), suggesting that countries contributing most to greenhouse gas emissions should contribute more, and the Ability to Pay principle (``respective capabilities"), suggesting that economically advantaged countries should contribute more.

In this paper, we propose a new methodology grounded in the latest advances from cooperative game theory to devise a fair burden-sharing method that integrates both the Polluter Pays principle and the Ability-to-Pay principle. We employ concepts from Transferable Utility (TU) games, a priori unions, and hierarchical structures to formulate our method, and conduct a normative study to emphasize the appeal of our solution.

The current algorithms to characterise equilibrium coalition structure of farsighted agents in public-good games are designed for payoff functions which only depend on the contribution to the public good and the resulted public good. However in climate games, the payoffs of countries participating in climate negotiations, often depend on other variables, for example the time horizon of policy makers or the unknown climate damage. We show in such settings the equilibrium coalition structure depends on the second variable too. In this paper we offer an algorithm to characterise the equilibrium coalition structure of such games and we provide two applications of climate coalition formation.