May 2010


I have recently written a working paper, available from the Environmental Economics Research Hub website.

Wood, P. J., 2010, ‘Climate Change and Game Theory: a Mathematical Survey‘, Environmental Economics Research Hub Research Report No.62.

The abstract is as follows:

This survey paper examines the problem of achieving global cooperation to reduce greenhouse gas emissions. Contributions to this problem are reviewed from non-cooperative game theory, cooperative game theory, and implementation theory.

Solutions to games where players have a continuous choice about how much to pollute, games where players make decisions about treaty participation, and games where players make decisions about treaty ratification, are examined. The implications of linking cooperation on climate change with cooperation on other issues, such as trade, is examined. Cooperative and non-cooperative approaches to coalition formation are investigated in order to examine the behaviour of coalitions cooperating on climate change.

One way to achieve cooperation is to design a game, known as a mechanism, whose equilibrium corresponds to an optimal outcome. This paper examines some mechanisms that are based on conditional commitments, and could lead to substantial cooperation.

This post was published in Crikey on Friday, 14 May 2010.

When defending putting off the Carbon Pollution Reduction Scheme (CPRS) until “the end of the Kyoto commitment period”, Kevin Rudd stated that “progress on global action has been slower than any of us would like”. The Copenhagen Accord may not have resulted in a legally binding agreement, but countries are now working out policies to implement their Copenhagen commitments. The Australian policy to not reintroduce legislation until 2013 leaves Australia in danger of being left behind.

In particular, it is becoming increasingly likely that China will introduce a price on greenhouse gas emissions before Australia does. China Daily is reporting that China is likely to be levied between 2011 and 2015. Business Green has reported that the Chinese language Economic Information Daily quoted the Chinese Ministry of Finance saying that the tax will be introduced in 2012 or 2013, will start at 20 yuan per tonne of carbon dioxide, and rise to 50 yuan (about $A8) by 2020. Professor Ross Garnaut has since announced that China is better than Australia on climate action. Ironically, Business Green is reporting that China will also introduce resource tax reform, probably not welcome news to the mining companies that have been complaining about the CPRS and an Australian resource rent tax.

The US Senate is now considering a Bill — the American Power Act — that will place a cap on emissions from 2013. It would reduce carbon pollution by 17% by 2020, and more than 80% by 2050. Australia is committed to a 60% reduction by 2050. The US legislation may not get past the Senate, but the Obama Administration is supporting it and not planning to postpone things until 2013.

In 2009, emissions covered by the European Union emissions trading scheme dropped by 11%. Part of this drop in emissions would have been due to the global recession, but the EU ETS has been in operation since 2005. Tony Abbott has advocated a “wait for the rest of the world” strategy on climate change, and Kevin Rudd now appears to be advocating the same thing. If Australia’s policy is to wait for the rest of the world, then the time to act is now.