A Mechanism Design Approach to Climate-Change Agreements

Abstract

We take a mechanism design perspective to investigate how environmental agreements should account for multilateral externalities, incentive compatibility, and voluntary participation by sovereign countries. The optimal mechanism involves a tradeoff between a free rider problem in the effort provision of participating countries and the necessity of inducing countries to ratify the agreement. This mechanism can be approximated by a simple menu with attractive implementation and robustness properties. Limits on enforcement and commitment might nevertheless hinder the performance of this menu, making the "business as usual" scenario more likely. (JEL: Q54, D82, H23)

Solving the global warming problem: beyond markets, simple mechanisms may help!

“…These payoffs in turn depend on the various conjectures that this country will entertain on the behavior of the ratifying ones. This issue is in fact a difficult one that we study at more length in Martimort and Sand-Zantman (2012). For the purpose of this paper, we follow Tulkens (1995, 1997) and assume that the approval of all countries is necessary to implement the market solution.…”

“…The general analysis that we develop in Martimort and Sand-Zantman (2012) shows that those three properties apply to more general (nonlinear) mechanisms. Yet, those simple menus with two options already highlight some important economic properties.…”

“…Although their contribution stresses the role of free riding in effort provision, it remains silent on free-riding problems in participation because they import the mechanism design methodology 6 developed for standard public good problems without taking care of the specific participation constraints that sovereignty imposes. This is the road we follow in a companion paper (Martimort and Sand-Zantman, 2012). That paper characterizes optimal mechanisms without making any restriction on the complexity of menus.…”

Climate Policies with Private Information: The Case for Unilateral Action

“…Accordingly, the payo¤ function is a convex combination of the cases where i a¤ects the bene…ts of emissions (as in Helm and Wirl (2014)), or the costs (as in Martimort and Sand-Zantman (2015)). Observe that a higher i always reduces the payo¤, independent of .…”

“…As a consequence, negotiators are often uncertain about the objective function of their counterparts. This relevance of private information for negotiating a climate contract has been emphasized in some recent contributions (e.g., Martimort and Sand-Zantman (2015), Martimort and Sand-Zantman (2013), Konrad and Thum (2014), Helm and Wirl (2014)), and it motivates our methodological approach to analyze the consequences unilateral action.…”