New Horizons in Environmental Economics series
Chapter 14: Coalition Models: A Second Approach
INTRODUCTION 14.1 In this chapter the coalition formation process in a global emission game is analyzed in a supergame framework by applying the concept of a weakly renegotiation-proof equilibrium (WRPE).1 We proceed in two steps. First, stability of a grand coalition is analyzed (Section 14.3), assuming discount factors close to 1 (Sub-section 14.3.2) and discount factors smaller than 1 (Sub-section 14.3.3). Stability will be investigated for seven diﬀerent emission vectors: 1. 2. 3. 4. 5. 6. 7. a socially optimal solution; a globally optimal uniform emission tax; a globally optimal uniform emission reduction quota; a uniform emission tax if the median country’s proposal is applied; a uniform emission reduction quota if the median country’s proposal is applied; a uniform emission tax if the lowest common denominator decision rule (LCD decision rule) is applied; a uniform emission reduction quota if the LCD decision rule is applied. Additionally, the maximum emission reduction under a uniform tax and uniform quota regime will be determined which can be sustained as a WRPE. This is done to evaluate the eﬃciency of the two policy regimes independently of the decision rule chosen among the negotiators. Each emission vector implies a diﬀerent abatement target and a diﬀerent welfare allocation among countries. Transfers to alter the welfare allocation implied by an emission vector are not considered.2 Since a uniform tax is a cost-eﬃcient instrument to tackle a pure public bad (see Section 11.2), a globally optimal uniform tax leads to a socially...
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