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Game Theory and International Environmental Cooperation

Michael Finus

The book investigates various strategies to provide countries with an incentive to accede, agree and comply to an international environmental agreement (IEA). Finus shows that by integrating real world restrictions into a model, game theory is a powerful tool for explaining the divergence between ‘first-best’ policy recommendations and ‘second-best’ designs of actual IEAs. For instance he explains why (inefficient) uniform emission reduction quotas have played such a prominent role in past IEAs despite economists’ recommendations for the use of (efficient) market-based instruments as for example emission targets and permits. Moreover, it is stated, that a single, global IEA on climate is not necessarily the best strategy and small coalitions may enjoy a higher stability and may achieve more.
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Chapter 11: Bargaining over a Uniform Emission Reduction Quota and a Uniform Emission Tax

Michael Finus


INTRODUCTION 11.1 In Section 10.5 we discussed how an auction of emission reductions could work. An auctioneer calls up different exchange rates which define the relation of emission reductions of countries and asks the participants for offers. The auction equilibrium was defined as that exchange rate where offers match. Thus, the bargaining market clears via an adjustment of ‘prices’. In reality, however, a different bargaining rule can frequently be observed at the pre-stage leading to an IEA. The exchange rate is fixed through an institutional framework and countries agree on the lowest bid, that is, on the lowest common denominator. For instance, potential signatories to an IEA frequently negotiate on a uniform emission reduction quota, which implies that countries have to reduce emissions by the same percentage compared to some base year. Typically that country which proposes the lowest reduction will be the ‘bottleneck’ in the negotiations and defines the terms of the agreement. The list of examples of uniform emission quotas is long and includes the Montreal Protocol on Substances that Deplete the Ozone Layer, which specified an emission reduction of CFCs and halons by 20 percent based on 1986 emission levels to be accomplished by 1998.1 Another example is the Helsinki Protocol, which suggested a reduction of sulfur dioxide from 1980 levels by 30 percent by 1993. Moreover, the Sofia Protocol Concerning the Control of Emissions of Nitrogen Oxides or Their Transboundary Fluxes signed in 1988 called on countries...

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