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The International Yearbook of Environmental and Resource Economics 2003/2004

A Survey of Current Issues

Edited by Henk Folmer and Tom Tietenberg

This major annual publication provides a state-of-the-art survey of contemporary research on environmental and resource economics by some of the leading experts in the field.
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Chapter 3: Stability and design of international environmental agreements: the case of transboundary pollution

Michael Finus


Michael Finus* 1. INTRODUCTION Concern about international environmental problems1 has grown immensely over the last four decades. This led to the signature of several international environmental agreements (IEAs), as for instance the Helsinki and Oslo Protocols on the reduction of sulphur signed in 1985 and 1994, respectively, the Montreal Protocol on the reduction of chlorofluorocarbons (CFCs) that deplete the ozone layer signed in 1987 and the Kyoto Protocol on the reduction of greenhouse gases causing global warming signed in 1997.2,3 This concern is also reflected in numerous papers on the economics of international environmental problems. In this chapter I survey the game-theoretical literature on coalitions analysing the formation and stability of IEAs. The fundamental result motivating all analyses is that as long as environmental problems are not of purely local nature, global welfare can be raised through cooperation. The fundamental assumption of all models is that there is no international agency that can establish binding agreements.4 Consequently, cooperation faces three fundamental constraints (see section 2.1 for details): (1) IEAs have to be profitable for all potential participants; (2) the parties must agree on the particular design of an IEA by consensus; and (3) the treaty must be enforced by the parties themselves. The main feature according to which models can be structured is the type of free-riding they capture. Two types of free-riding can be distinguished. The first type implies that a country is either not a member of an IEA or is a member of...

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