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Using game theory to analyse energy and water issues in the face of climate change. Background The development of the future low carbon energy system is highly uncertain. This uncertainty stems from the inherent complexity of the highly interconnected `global system’, the interaction of governments and institutions to address environmental targets and ultimately the mechanisms employed in the long-term to deal with the worst impacts of climate change. Uncertainty in energy and environment policy has tended to be studied by the development of analytical tools and conceptual models, characterised by the integration of the physical dimension of resources and energy with an economic dimension, in the form of computer models. These computer models develop economically optional solutions for forecasting different pathways in order to provide guidance to policy makers. However, these models fail to consider the social-political dimension of policy making and strategic behaviour of local and regional policymakers under complexity and uncertainty. The role of game theory in developing new insights In this context, social science based methods, such as game theory can provide insights into the strategic management of complexity in the energy and environmental domains. Game theory is the mathematical study of competition and cooperation. It illustrates how strategic interactions amongst players result in outcomes with respect to the preferences of those players as well as their possible moves and counter-moves. It can be applied in any field where more than one actor is involved in the decision making process and the final outcome depends on the participants strategic behaviour, their willingness to cooperate, risk attitude, access to information, uncertainty exposure and other behavioural factors. Game theory can be used to predict or describe how people behave and fulfil their own interests in the interactive decision-making process. In a typical game, decision makers (players), with their own goals, try to outsmart one another by anticipating each other’s decision. The game is resolved as a consequence of the players’ decisions. Solutions found using game theory for multi-criteria multi-decision maker problems are normally different from those found through conventional decision or behaviour analysis methods such as multicriteria decision analysis (MCDA) or even agent-based modelling (ABM). Game theory allows an understanding of behaviour in an interactive environment, providing planning, policy, and design insights, by: The modelling of multi-criteria multi-stakeholders problems where conventional research methods, due to their inherent assumption of perfect cooperation among decision makers, fail to provide a realistic result. Instead, game theory considers the self-optimizing behaviour of decision makers and their willingness to cooperate or remain uncooperative. 1 For example, the conflict over the Caspian Sea energy and environmental resources between the incumbent nations after the collapse of the Soviet Union1, or the case of the California’s Sacramento-San Joaquin Delta conflict over water exports where institutions developed by the state have been inefficient in implementing a billion dollar optimal solution2. Using qualitative information to analyse planning, design, and policy development problems when quantitative information is not readily available or difficult to estimate. For example, in case of selecting an implemented practical solution using both qualitative and quantitative information for the energy supply of the City of Fairbanks, Alaska3. Analysing bargaining, voting and negotiation situations where the dynamics of sequential interactions are not fully understood. For example, in the case of climate change international negotiations under different decision making processes such as fall-back bargain voting 4,5,6. The application of game theory to energy and water issues As we seek to transition to a sustainable low carbon future, energy and water issues have become increasingly interconnected. In order to address the scale and complexity of these interactions analysis has focused on the assessment of linkages between resources themselves, and not enough on the integration of their management into institutional systems and policy design processes. Therefore Game Theory provides the opportunity to advance a framework to abstract the interactions of decision-makers by focusing on competing objectives, lack of consistent quantitative information and non-cooperative behaviours. The pressing need for these tools is exemplified in the UK government’s development of the Sustainable Pathways to Low Carbon Energy (SPLICE) project, which aims to provide “Accessibility and comprehensive information for decision makers ... on the impacts of energy options to help make decisions about sustainable investment, deployment and mitigation”. The holding of a workshop on the 12th of May 2015 at Imperial College, 170 Queens Gate, aims to highlight how game theory tools can facilitate strategic analysis of complex energy and water problems for policy makers and the private sector. The workshop will seek to develop UK capacity to better understand these tools and how game theory can assist on the assessment of impacts of the dynamics of actors, incentives and other variables involved in energy and water policy design. For further information or queries regarding the workshop or the application of Game Theory should be directed at the following: Kaveh Madani Lecturer in Environmental Management, Imperial College London T: +44 (20) 7594 9346 E: [email protected] Homepage WaterSISWEB Fernando Parra ESRC Impact Grant Research Associate Imperial College London Workshop Organiser E: [email protected] . 2 11 Madani, K., Rouhani, O. M., Mirchi, A. & Gholizadeh, S. (2014) A negotiation support system for resolving an international trans-boundary natural resource conflict. 2 Madani, K. & Lund, J. R. (2012) California's Sacramento-San Joaquin Delta Conflict: From Cooperation to Chicken. Journal of Water Resources Planning and Management. 138 (2), 90- 99. 3 Read, L., Mokhtari, S., Madani, K., Maimoun, M., and Hanks, C. (2013) A Multi-Participant, Multi-Criteria Analysis of Energy Supply Sources for Fairbanks, Alaska. World Environmental and Water Resources Congress 2013: pp. 1247-1257. doi: 10.1061/9780784412947.123 4 Habla, W. & Winkler, R. (2013) Political influence on non-cooperative international climate policy. Journal of Environmental Economics and Management. 66 (2), 219-234 5 Finus, M., Kotsogiannis, C. & McCorriston, S. (2013) International coordination on climate policies. Journal of Environmental Economics and Management. 66 (2), 159-165 6 Madani, K. (2013) Modeling international climate change negotiations more responsibly: Can highly simplified game theory models provide reliable policy insights? Ecological Economics. 90, 68-76. 3