Agreeing on Efficient Emissions Reduction

Abstract

We propose a simple mechanism providing incentives to reduce harmful emissions to their efficient level without infracting upon productive efficiency. The mechanism employs a contest creating incentives among participating nations to simultaneously exert efficient productive and efficient abatement efforts. Participation in the most stylised form of the scheme is voluntary and individually rational; all rules are mutually agreeable and are unanimously adopted if proposed. The scheme balances its budget and requires no principal. In a perhaps more realistic stochastic output version which could potentially inform policy decisions, we show that the transfers required by the efficient mechanism create a mutual insurance motive which may serve as effective rationale for the (gradual) formation of International Environmental Agreements. (JEL C7, D7, H4, Q5.

The Dynamics of Climate Agreements

“…The additive form of q G G and the assumption that q G 2 .0; 1/ are particularly natural in pollution settings Radner 2004, 2009). 10. See, for example, Bos, Roussillon, and Schweinzer (2014), analyzing how investment contests can be designed to implement the first-best. If the model focused instead on technologies that reduced the emission content of each produced unit (as in Dutta and Radner 2004), the analysis which follows would be much harder.…”

Combating climate change with matching-commitment agreements

“…Seeking possible mechanisms for lowering global emissions, many researchers have turned to game theory (see Wood 2011 for a review). Most of the resulting proposals involve establishing a central authority that can punish non-participation and noncompliance or otherwise redistribute money or resources (either directly or by approving sanctions imposed by countries; e.g., Falkinger et al 1996;Barrett 2008;Gerber & Wichardt 2009;Nordhaus 2015;Bos et al 2016). But enforcement is difficult to achieve in practice, because, as pointed out by Nordhaus (2015), it conflicts with the principles of countries' sovereignty, equality and right to manage internal affairs without intervention, first established in the 1648 Treaty of Westphalia.…”