In game theory, there are a number of solution concepts, such as the Nash equilibrium, and the subgame perfect equilibrium, that help us to understand strategic behaviour. What role do these concepts have when looking at how to facilitate international cooperation on climate change?

When using a model to help understand a problem, it is important to be aware of the limitations of the model. Many applications of game theory require that decision makers are rational. That is, they have clear preferences, form expectations about unknowns, and make decisions that are consistent with these preferences and expectations. These assumptions may not be consistent with experimental psychology. Elinor Ostrom has considered the the role that human behaviour considerations relate to cooperation problems, and applied this to climate change. She found that a `surprisingly large number of individuals facing collective action problems do cooperate’. She also found that cooperation is more likely if people gain reputations for being trustworthy reciprocators; reliable information is available about costs and benefits of action; individuals have a long-term time horizon; and are not in a highly competitive environment.

So the application of game-theoretic solutions concepts should be taken with a pinch of salt. For example, there is Nash equilibrium that arises from a basic model where countries make a continuous choice about how much to reduce their emissions. As one would expect, this involves small amounts of emission reductions (that reflect the damage that a country will do to itself from its greenhouse gas emissions), but much less than would occur in a fully cooperative situation. But what if one country were to go first, and reduce its emissions by more than the Nash equilibrium choice? If the marginal damage from a tonne of emissions increase with respect to total emissions, then the Nash equilibrium response of other countries would be for them to reduce their emissions by less than they otherwise would (see e.g. Finus, 2001, Chapter 9). But behavioural considerations suggest that other countries would be likely to reciprocate, and reduce emissions by more than they otherwise would.

Eric Maskin, in a paper published in 2009, argues that “the principal theoretical and practical drawbacks of Nash equilibrium as a solution concept are far less troublesome in problems of mechanism design than in most other applications of game theory”. Mechanism design is focused on how to design games whose solution concepts lead to cooperative outcomes. One reason why game theoretic solution concepts are less troublesome in mechanism design, is that the rules of the game are clear to players, and to analysts. Another reason given by Maskin is that one can design games that do not have multiple equilibria or have equilibria that are stronger than the Nash equilibrium.

If humans are more cooperative than assumed in our models, the models could work as a ‘lower benchmark’, and at least as much cooperation as predicted by the models could be observed. When mechanisms have game theoretic solution concepts that could lead to more cooperation on climate change, such mechanisms ought to be given serious consideration.

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The absence of a comprehensive legally binding global deal has sometimes been used as an excuse for lack of policy action. Australia’s conservative opposition leader Tony Abbott claimed that the outcome at Copenhagen “vindicated his party’s decision not to support the Federal Government’s emissions trading scheme legislation”; the absence of an international deal was also an excuse when Australia’s former Prime Minister Kevin Rudd abandoned a proposed emissions trading scheme. But how much does slow international progress really matter?

In a report for the World Bank and a journal article, political scientist and Nobel Economics Prize winner Elinor Ostrom has argued that we should not wait for a ‘global solution’ to emerge from international negotiations before acting on climate change. Instead, action on climate change should occur at all scales. These include individual, community, municipal, regional, and national scales as well as the international scale.

Ostrom argues for a polycentric approach for several reasons:

  1. There is evidence that people are more likely to be cooperative than predicted by conventional game theory. People are in particular more likely to be cooperative when they trust each other to be reciprocators. For this reason, it is possible to have cooperative action without negotiating a ‘global solution’.
  2. Action on climate change can also lead to positive externalities such as clean air. Clean air is particularly relevant to China, where air pollution is a major problem.
  3. At any scale, policies may encounter errors, but without trial and error, learning cannot occur. A polycentric approach facilitates learning at multiple scales.

What implications does this have for critical areas of climate policy, such as technology and carbon pricing? Policies such as research and development, as well as investment in renewable energy, all help to drive down mitigation costs. Like clean air, this is a positive externality that we need more of.

Two major issues when trying to negotiate an international climate agreement are participation and compliance. This is one reason why legally binding agreements are desirable, but designing a treaty to maximize participation and compliance is difficult. When a country makes a commitment to reduce its emissions, how do we know it will meet this commitment? Action at multiple scales means that meeting such a commitment is much more likely. If a country introduces an emissions trading scheme, it will then be highly likely that it meets the target specified by the scheme. But in the United States, the national government did not successfully pass legislation. Fortunately there are regional measures in the United States that are reducing emissions: the Regional Greenhouse Gas Initiative is an emissions trading scheme that operates in ten states; eleven states and provinces in the US and Canada are developing the Western Climate Initiative; and seven states and provinces in the US and Canada are developing the Midwestern Greenhouse Gas Accord. These approaches make it easier for the United States to argue that it will reduce emissions by 17 percent by 2020.

Because domestic policies and measures add credibility to countries’ targets, a climate agreement with a mechanism for countries to list their policies and measures as well as targets is more likely to be successful. The Copenhagen Accord had annexes for developed countries to specify their targets and developing countries to specify policies and measures. It would make sense for climate agreements to have developed countries specify policies and measures as well.

The good news is that action on climate change is occurring at multiple scales. If Ostrom is right, there are reasons to be optimistic about the prospects for long-term cooperation. But there still are advantages to more agreement at an international level, including less excuses for inaction from politicians.

Today the Rudd Government backed away from implementing their emissions trading scheme (the CPRS) until 2013, making a carbon price in Australia before then very unlikely. The CPRS had many flaws, but was far superior to there being no carbon price at all, and could have been changed later. The Rudd government was facing difficulties getting a carbon price through parliament, but there were two ways that it could have done so:

  • It could have negotiated with the Greens to implement an interim carbon tax, while the details of an emissions trading scheme are worked out later;
  • If could have used the CPRS legislation as the trigger for a double dissolution election, in which case the legislation could be put before a joint sitting of both houses of parliament.

Instead the government has decided that they dont want climate change to be an election issue, and the Prime Minister has hardly mentioned climate change in the past 3 months. This contrasts very strongly with his rhetoric last year. At Copenhagen, he gave a speech where he said:

When I arrive home at the end of this week, will I be able to sit down, look my children in the eyes and tell them in clear conscience that I did absolutely everything I could to achieve action to avoid dangerous climate change.

Because if we cannot, then we will have failed in our basic duties as leaders of our nations, as fathers and mothers of our children and custodians of our nations’ future.

The children of the world are watching.

They are listening.

And history will be the judge of each of us here today.

Now that the Copenhagen meeting is over, does this mean that history will no longer be judging our action on climate change? Will Kevin Rudd be able to look his children in the eye and say “I did absolutely everything I could to achieve action to avoid dangerous climate change”? History may well judge that Kevin Rudd has jumped the shark today.

Kevin Rudd has said (in defense of postponing the CPRS)
“The rest of the world is being slower to act on appropriate action on climate change.
“It’s very plain that the correct course of action is to extend the implementation date.”
In her paper ‘A Polycentric Approach for Coping with Climate Change’. Policy Research Working Paper 5095. World Bank., Nobel prize winner Elinor Ostrom said:
Given the severity of the threat, simply waiting for resolution of these issues at a global level, without trying out policies at multiple scales because they lack a global scale, is not a reasonable stance.

Ostrom has made it clear why it is unreasonable for individual countries to wait for the rest of the world.