Download Climate change policy and game theory

Climate Change Policy and
Game Theory
Martin Sewell
[email protected]
E3 Foundation & 4CMR
Rapid Decarbonisation Project: Workshop 3
London
21 September 2011
Economics of CO2 emissions
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The burning of fossil fuels releases CO2 into the atmosphere.
CO2 is a greenhouse gas that contributes to global warming.
Therefore the burning of fossil fuels reduces global social utility.
We have a market failure, CO2 emissions being a negative externality.
A hypothetical global government would seek to correct the market failure by
taxing CO2 emissions.
Typically, the emissions from burning fossil fuels within a nation have only a
minor negative impact on national social utility, but a nation suffers
significantly from emissions due to the rest of the world also burning fossil
fuels.
So, individual nations have little incentive to tax CO2 emissions, but the world as a
whole would be better off if all nations taxed emissions.
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Tragedy of the commons
Human-induced climate change is a classic case of the tragedy of the
commons (Hardin 1968)—the benefits of burning fossil fuels accrue to
individuals, companies and nations, whilst the costs accrue to the planet as a
whole.
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Prisoner’s dilemma
• The most famous game in game theory.
• In 1950, puzzles with a similar structure to the prisoner’s dilemma
were developed by RAND Corporation scientists Merrill Flood and
Melvin Dresher.
• Princeton mathematician Albert W. Tucker formalized the game with
prison sentence payoffs.
• Formally, the prisoner’s dilemma is a non-zero-sum game in which the
unique Nash equilibrium (both players defect) is not a Pareto-optimal
solution (both players cooperate).
• The prisoner’s dilemma is ubiquitous in our lives: the key dilemma an
individual faces is when to behave selfishly in the immediate term, and
when to risk cooperating in the hope of engaging in reciprocal
altruism.
• Good reference: Poundstone (1993)
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Prisoner’s dilemma payoff matrix
Cooperate
Defect
win
win much
Cooperate
win
lose much
lose much
lose
Defect
win much
lose
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Multi-player, single cell prisoner’s dilemma
• Multi-player generalization of the prisoner’s dilemma
(there are many prisoners, not two).
• Communication is possible (prisoners all in the same
cell, not separated).
Cooperation may be either unilateral or multilateral.
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Which strategy is best?
Disadvantages of unilateral cooperation
Motivating a reduction of fossil fuel consumption on anything other than a global
scale will not only be less effective, but may create perverse incentives: if those
countries that burn fossil fuels the most efficiently cut back, more of the
remaining fossil fuels will be used up by those countries that burn fossil fuels less
efficiently, leading to greater overall emissions.
Disadvantages of multilateral cooperation
Trying to bring all countries into a binding international agreement to reduce
emissions at this time makes little sense because such agreements are extremely
difficult to achieve and impossible to enforce.
Disadvantages of defection
Humans are very efficient cheater detectors, and apt at identifying and punishing
freeloaders.
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What do economists think?
Should the US government commit to greenhouse gas reductions?
source: Holladay, Horne and Schwartz (2009)
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Unilateral-with-a-view-to-motivatingmultilateral
What actions can my country take that would induce other countries to make
emissions reductions on a similar and/or significant scale? We wish to
disincentivize free riding by other significant emitters.
It appears that subsidies for renewable energy in the West lead to the
development of renewables in China, India and other developing nations,
which should drive the price of green technologies down.
Examples
•95% of China’s solar panels are exported (Watts 2009).
•India became the third largest exporter of wind turbines in 2008
(Prahalathan, Kumar and Mazumdar 2011).
•Developing countries’ share of world exports in green products increased
from 24% in 2002 to 50% in 2009 (BusinessWorld 2011).
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Fossil fuel subsidies
• Half of the world’s population enjoys
fossil fuel subsidies (The Economist
2008).
• Fossil-fuel consumption subsidies
worldwide amounted to $312 billion
in 2009, the vast majority of them in
non-OECD countries (IEA 2010).
• As explained above, the burning of
fossil fuels creates a negative
externality, so for global efficiency
should be taxed, certainly not
subsidised.
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References
BusinessWorld, 2011. ‘Green’ demand seen opening export opportunities. 26
June 2011.
HARDIN, Garrett, 1968. The tragedy of the commons. Science, 162(3859), 1243–
1248.
HOLLADAY, J. Scott, Jonathan HORNE, and Jason A. SCHWARTZ, 2009.
Economists and Climate Change: Consensus and Open Questions. Volume 5
of Policy Brief. New York: Institute for Policy Integrity, New York University
School of Law.
International Energy Agency, 2010. Key World Energy Statistics 2010. Paris:
OECD/IEA.
POUNDSTONE, William, 1993. Prisoner’s Dilemma. New York: Anchor Books.
PRAHALATHAN, S., Ashish KUMAR, and Rahul MAZUMDAR, 2011. New
renewable energy in India: Harnessing the potential. Occasional Paper 143,
Export-Import Bank of India, Mumbai.
The Economist, 2008. Fuel subsidies: Crude measures. pp. 91–92. 29 May 2008.
WATTS, Jonathan, 2009. China puts its faith in solar power with huge renewable
energy investment. The Guardian. 26 May 2009.
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