Design Aspects of a Climate Policy Agreement
Handling International Environmental Cooperation
As explained in Chap. 1, achieving an ‘ideal’ international climate policy coalition is difficult to achieve due to a number of aspects which are well understood from literature about game theory. One aspect is the absence of an overarching international authority, such as an international government. As sovereign states, countries (or groups of countries) cannot be forced to join an international climate coalition and they may decide not to adopt a climate agreement if they consider this not in line with their domestic preferences. As a consequence, if too many countries feel that proposed greenhouse gas emission reduction measures are too strict and therefore too costly for them, negotiations may move towards softening proposed measures in order to get more countries on board of a climate coalition (Barrett 1999; Kiyono and Okuno-Fujiwara 2004). This possible trade-off between higher or lower targets and country support for an agreement results in a challenge to design an international climate policy regime which keeps emission reduction measures sufficiently strict for meeting the UNFCCC precautionary principle (as explained in Chap. 1) and stimulates a sufficient number of countries to join the coalition for achieving climate policy goals.
For the latter, compensatory measures or ways to reduce the costs of compliance could be introduced, which is not only important for making it attractive for countries to join a coalition but also to support their compliance with commitments in the agreement. After all, the absence of an overarching disciplinarian also complicates enforcement of compliance with the agreement made by the coalition. Of course, not committing to objectives in an international policy regime may cause a loss of goodwill for a country, a complaint in the framework of the International Court of Justice or a sanction, but these ‘sanctions’ could become difficult to impose and are far from a guarantee that countries will comply with multilateral treaties (Barrett 1999; Barton et al. 2006). In fact, as will be described in Chap. 3, in spite of the US agreement with the Kyoto Protocol in 1997, the country never ratified the protocol. Moreover, to give another example, Canada’s ratification of the Kyoto Protocol in 2002 was followed in 2012 by a unilateral decision by the Canadian government not to comply with its quantified greenhouse gas emission reduction commitments under the Protocol (see Chap. 5). There was little that the international climate policy regime could do to prevent these cases.
At the same time, an important reason for international cooperation on environmental issues is that it enables countries to reduce costs and achieve larger benefits than in case of unilateral country actions (Barrett 1991). Collaboration enables countries to explore options for cost reductions, such as through the use of concepts of emissions trading and international division of abatement actions (Jepma 1995). This insight is generally supported by game theory, which has been well known since the work by Von Neumann and Morgenstern (Neumann and Morgenstern 1944).
Game theory is based on games where two or more individuals choose strategies to maximise their benefits in competitive situations. The individuals are faced with clear rules and it is assumed that they behave fully rationally and that information is exchanged symmetrically among the players in the game. Particularly interesting for the discussion on climate policy negotiations are the so-called non-cooperative games,1 which refer to situations in which no overarching authority exists to assure that players stick to the agreed rules. Hence, as explained above, cooperation in these games must be self-enforcing.  A well-known example of a non-cooperative game is the so-called ‘prisoners’ dilemma’, which explains how players are worse off if they do not collaborate, in comparison to a situation in which collaborate (Stanford Encyclopedia of Philosophy 2009).
Key characteristics of the prisoners’ dilemma are that both players act rationally, have the same amount and type of information and do not communicate with each other. After all, should they be able to exchange views on the situation they have been placed in, a different outcome would have been likely in order to create a larger common surplus. Another characteristic of this game is that there is no repetition. Should the game be repeated in a second round, then players may make different choices based on their behaviour in the first round.
It can be argued that decision making on climate change resembles the prisoners’ dilemma. Suppose, taking a very stylistic example, that a country has two choices regarding what policy it will undertake concerning climate change: it can take greenhouse gas emission reduction measures or it can decide not to take any action. Moreover, there is no international regime and no information exchange among countries, although all countries have access to the same information sources, so that a country will have to assume what other countries will do in terms of climate policy. For the other countries, also two options exist: carry out climate change abatement policy or no climate policy activities at all.
In case the country assumes that the other countries are all likely to carry out greenhouse gas emission reduction measures, it has an incentive to undertake no action. After all, by doing nothing the country would benefit from the activities by all other countries at zero costs. Hence, in this case the country could be a free rider, taking profit of the public good created by other countries. On the other hand, if the country assumes that none of the other countries will carry out climate policy measures, it has no incentive to undertake abatement action itself; the benefits from such action would generally be much smaller than the costs, especially when the country is small or medium-sized. This outcome resembles the prisoners’ dilemma case: whatever the policy action by other countries, without a cooperative framework, the country’s optimal policy is to refrain from climate change abatement action. A repetition of the game in a second round of negotiations could lead to a different outcome, for instance, if it turns out that refraining from abatement action leads to considerable environmental damage and economic costs.
Another extension of the prisoners’ dilemma, and which has a high relevance for environmental issues, has become known as the ‘tragedy of the commons’. The origin of this concept goes even back to Aristotle (“What is common to the greatest number has the least care bestowed upon it”) (Ostrom 1990) and in more recent scientific literature its roots go back to Hardin (1968). The commons refer to any resource which is shared by a group of people, e.g., air and water, but also land, fish and wood. A general characteristic of commons is that they are not protected by property rights as everybody can freely use the commons.
A problem that could arise with using the commons, and this is where the link to the ‘prisoners’ dilemma’ can be made, is that overuse reduces their quality. For example, the overuse of land in Britain in the fourteenth century (as in Hardin’s example) due to the free use of common pastures by nearby villages to graze horses, cattle and sheep, resulted in ruining of the pastures. In order to halt this process, property rights were introduced by parcelling up the common pastures in individually owned parcels. Each household then had a responsibility for its own parcel and an incentive to prevent overgrazing.
The ‘tragedy of the commons’ is also often used in the context of fishing (too much fishing would deteriorate fish populations) and in the context of air pollution: considering the air as a common, people have emitted pollutants in the air, which has gradually reduced air quality. Based on these examples, the tragedy of the commons can be defined as the result of the perception of people that using a ‘common’ results in an individual benefit, whereas the costs of using it can be shared so that they are hardly felt by individuals. As a consequence, up to the point where the ‘tragedy of the commons’ is truly felt by the users themselves, there is little incentive to adjust behaviour in terms of, e.g., reduction of emissions of pollutants.
This makes the ‘tragedy of the commons’ helpful in describing the issue of global warming and why it is taking place and why it could become a problem (Bohringer 2002; Paavola 2011). It also offers some solutions for addressing the problem (internalising the costs of emissions in individual cost calculations, e.g., with a Pigovian tax, or translating emissions into individual property rights), but its value to the discussion of what an optimal size of a stable climate coalition would be is limited. The concept of ‘public goods’ is more useful for that purpose.
Although interrelated, the ‘tragedy of the commons’ and the ‘public goods’ concepts are different in the sense that the first refers to the over-use of a common good, whereas a public good is a good from which no-one can be excluded. In the example of global warming, a ‘tragedy of the commons’ takes place when worldwide emissions of greenhouse gases lead to climate change; the reduction of greenhouse gas emissions and the prevention of global warming would then be a public good. Especially, the public good characteristic of climate change policy has turned out to be important when designing a climate regime. This is mainly because of the free-rider incentive that countries may have when they see that others are active with abatement policies whereas no country can be excluded from the improved circumstances. In conclusion, international climate policy aims at preventing a ‘tragedy of the commons’ situation for the global climate, but must prevent free rider behaviour due to the public good character of the results of the formulated policy.
The above discussion has shown that insights from game theory help explain why climate policy negotiation outcomes, in an attempt to reach consensus among UNFCCC Parties, often result in lower greenhouse gas emission reduction targets than in an ‘ideal’ situation (as illustrated in Chap. 1). Within the eventually achieved coalition, countries try to achieve the best outcomes for themselves individually and, depending on the negotiation case, for the ‘group’ (such as the global climate). How this game has been played so far by countries in the context of establishing a climate regime will be discussed elsewhere in this book, based on experience with negotiating the UNFCCC, the Kyoto Protocol and the Paris Agreement.