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International environmental
Learning objectives
How do international environmental problems differ from national (or sub-national) problems?
What additional issues are raised by virtue of an environmental problem being international?
What insights does game theory bring to our understanding of international environmental policy?
What determines the degree to which cooperation takes place between countries and policy is
coordinated? Put another way, which conditions favour (or discourage) the likelihood and extent of
cooperation between countries?
Why is cooperation typically a gradual, dynamic process, with agreements often being embodied
in treaties or conventions that are general frameworks of agreed principles, but in which
subsequent negotiation processes determine the extent to which cooperation is taken?
Is it possible to use such conditions to explain how far efficient cooperation has gone concerning
upper-atmosphere ozone depletion, and global climate change?
Game theory analysis
Game theory is used to analyse choices where the outcome of a decision by one
player depends on the decisions of the other players, and where decisions of others
are not known in advance.
This interdependence is evident in environmental problems.
For example, where pollution spills over national boundaries, expenditures by any
one country on pollution abatement will give benefits not only to the abating country
but to others as well.
Similarly, if a country chooses to spend nothing on pollution control, it can obtain
benefits if others do so.
So in general the pay-off to doing pollution control (or not doing it) depends not only
on one’s own choice, but also on the choices of others.
We use game theory to investigate behaviour in the presence of global or regional
public goods.
The arguments also apply to externalities that spill over national boundaries.
Two-player binary-choice
Y’s strategy
Strategy 1
Strategy 2
Strategy 1
a, a
b, c
Strategy 2
c, b
d, d
X’s strategy
Figure 9.1 Two player binary choice games
Y’s strategy
X’s strategy
0, 0
5, -2
-2, 5
3, 3
Figure 9.2 A two-player pollution abatement game
The payoff matrix here has a structure of payoffs known as a Prisoners’
X and Y are two countries, each of which faces a choice of whether to abate pollution or not to abate
pollution (labelled ‘Pollute’). Pollution abatement is assumed to be a public good so that abatement by
either country benefits both. Abatement comes at a cost of 7 to the abater, but confers benefits of 5 to
both countries. If both abate both experience benefits of 10 (and each experiences a cost of 7).
Characteristics of this solution
1. The fact that neither country chooses to abate pollution implies that
the state of the environment will be worse than it could be.
2. The solution is also a Nash equilibrium.
– A set of strategic choices is a Nash equilibrium if each player is doing the best
possible given what the other is doing.
– Put another way, neither country would benefit by deviating unilaterally from the
outcome, and so would not unilaterally alter its strategy given the opportunity to
do so.
3. The outcome is inefficient. Both countries could do better if they had
chosen to abate (in which case the pay-off to each would be three
rather than zero).
Why has this state of affairs
come about?
1. The game has been played non-cooperatively. We shall examine shortly
how things might be different with cooperative behaviour.
2. The second concerns the pay-offs used in Figure 9.2. These pay-offs
determine the structure of incentives facing the countries. They reflect the
assumptions we made earlier about the costs and benefits of pollution
abatement. In this case, the incentives are not conducive to the choice of
3. The pay-off matrix in Figure 9.2 is an example of a so-called Prisoner’s
Dilemma game. The Prisoner’s Dilemma is the name given to all games in
which the pay-offs, when put in ordinal form, are as shown in Figure 9.3.
Y’s strategy
X’s strategy
2, 2
4, 1
1, 4
3, 3
Figure 9.3 The two-player pollution abatement Prisoners’ Dilemma game: ordinal form
• In all Prisoner’s Dilemma games, there is a single Nash equilibrium.
• This Nash equilibrium is also the dominant strategy for each player.
• The pay-offs to both countries in the dominant strategy Nash
equilibrium are less good than those which would result from
choosing their alternative, dominated strategy.
• As we shall see in a moment, not all games have this structure of
• However, so many environmental problems appear to be examples
of Prisoner’s Dilemma games that environmental problems are
routinely described as Prisoner’s Dilemmas.
A ‘cooperative’ solution
Suppose that countries were to cooperate, perhaps by negotiating an
Would this alter the outcome of the game?
Intuition would probably lead us to answer yes. If both countries agreed to
abate – and did what they agreed to do – pay-offs to each would be 3 rather
than 0.
In a Prisoner’s Dilemma cooperation offers the prospect of greater rewards
for both countries, and in this instance superior environmental quality.
But this tentative conclusion is not robust.
Sustaining the cooperative’
Can these greater rewards be sustained?
If self-interest governs behaviour, they probably cannot.
To see why, note that the {Abate, Abate} outcome is not a Nash equilibrium.
There is no external authority with the authority to impose a binding
Moreover, this agreement is not ‘self-enforcing’. Each country has an
incentive to defect from the agreement – to unilaterally alter its strategy
once the agreement has been reached.
Other forms of game
• Not all games have the structure of the Prisoner’s
Dilemma (PD).
• Even where a game does have a PD pay-off matrix
structure, the game may be played repeatedly.
– As we shall see later, repetition substantially increases the
likelihood of cooperative outcomes being obtained.
• Furthermore, there may be ways in which a PD game
could be successfully transformed to a type that is
conducive to cooperation.
• We now look at some other game structures.
Y’s strategy
-4, -4
5, -2
-2, 5
3, 3
X’s strategy
Figure 9.4 A two-player Chicken game
Figure 9.5 Extensive form of Chicken game
(-4, -4)
(5, -2)
(-2, 5)
A strategy in which both countries abate pollution could be described as the
“collectively best solution” to the Chicken game as specified in Figure 9.4; it
maximises the sum of the two countries pay-offs.
But that solution is not stable, because it is not a Nash equilibrium. Given the position
in which both countries abate, each has an incentive to defect (provided the other
does not).
A self-enforcing agreement in which the structure of incentives leads countries to
negotiate an agreement in which they will all abate and in which all will wish to stay in
that position once it is reached does not exist here.
However, where the structure of pay-offs has the form of a Chicken game, we expect
that some protective action will take place. Who will do it, and who will free-ride,
depends on particular circumstances.
Leadership by one nation (as by the USA in the case of CFC emissions reductions)
may be one vehicle through which this may happen.
B’s strategy
Do not
Do not contribute
0, 0
0, -8
-8, 0
4, 4
A’s strategy
Figure 9.6 A two-player Assurance game
Games with multiple players
Our example
Most international environmental problems involve several countries and
global problems a large number.
Much of what we have found so far generalises readily to problems
involving more than two countries.
Let N be the number of countries affected by some environmental problem,
where N ≥ 2. For simplicity, we assume that each of the N countries is
We revisit the Prisoner’s Dilemma example.
As before, each unit of pollution abatement comes at a cost of 7 to the
abating country; it confers benefits of 5 to the abating country and to all
other countries.
For the case where N = 10, the pay-off matrix can be described in the form
of Table 9.1.
Structure of pay-offs
• The structure of pay-offs is critical in determining whether
cooperation can be sustained.
• Following Barrett (1997), we explore the pay-offs to choices in a
more general way.
• Denote NBA as the net benefit to a country if it abates and NBP as
the net benefit to a country if it pollutes (does not abate).
• Let there be N identical countries, of which K choose to abate.
• We define the following pay-off generating functions:
NBP = a + bK;
NBA = c + dK
where a, b, c and d are parameters.
Structure of pay-offs
NBP = a + bK;
NBA = c + dK
• By altering these parameter values, we generate different pay-off
• For the problem in Table 9.1 we have a = 0, b = 5, c = –7 and d = 5.
Figure 9.7.
Figure 10.7 The payoffs to one country from abating and from not abating as the number of other countries abating varies.
Figure 9.8 The payoffs to one country from abating and from not abating as
the number of other countries abating varies: alternative set of parameter values
Figure 9.9 The payoffs to one country from abating and from not abating as the
number of other countries abating varies: third set of parameter values (a = 0, b
=5, c = 3 and d = 3)
Continuous choices about the
extent of abatement
We can generalise the discussion by allowing countries to choose – or
rather negotiate – abatement levels.
This can be done with some simple algebra. We leave you to read this for
yourself; here just report some key results.
Non-cooperative behaviour
Each country chooses its level of abatement to maximise its pay-off,
independently of – and without regard to the consequences for – other
countries. That is, each country chooses its abatement level, z, conditional
on z being fixed in all other countries.
The solution: each country abates up to the point where its own marginal
benefit of abatement is equal to its marginal cost of abatement.
Full cooperative behaviour
Full cooperative behaviour consists of N countries jointly choosing levels of
abatement to maximise their collective pay-off. This is equivalent to what
would happen if the N countries were unified as a single country that
behaved rationally.
The solution: abatement in each country is chosen jointly to maximise the
collective pay-off.
This is the usual condition for efficient provision of a public good. That is, in
each country, the marginal abatement cost should be equal to the sum of
marginal benefits over all recipients of the public good.
The full cooperative solution can be described as collectively rational: it is
welfare-maximising for all N countries treated as a single entity. If a
supranational government existed, acting to maximise total net benefits, and
had sufficient authority to impose its decision, then the outcome would be
the full cooperative solution.
Figure 9.10 A comparison of the non-cooperative and full cooperative solutions to an
environmental public good problem
International environmental
agreements (IEAs)
Role of UN framework: linkage of issues - environmental protection,
environmental sustainability and economic development.
But much of what is important has been dealt with at regional or bilateral
levels, and takes place in relatively loose, informal ways.
The need for international treaties arises from the fact that political
sovereignty resides principally in nation states.
The European Union may be a challenge to that proposition.
In the absence of a formal supranational political apparatus with decisionmaking sovereignty, the coordination of behaviour across countries seeking
environmental improvements must take place through other forms of
international cooperation: such as formal international treaties.
Effectiveness of IEAs
Judging effectiveness of IEAs requires construction of a counter-factual –
what would have happened anyway if the IEA had not been reached.
Then, abatements achieved under an IEA can be compared with the
counter-factual estimated abatement levels in the absence of the treaty.
In other words, the test of effectiveness of agreements is by comparison of
the Nash (non cooperative) and cooperative outcomes.
By this criterion, the literature on IEAs suggests that they are likely to be
very limited in their effectiveness.
Key results
Three assertions about the effectiveness of IEAs seem to emerge from the
theoretical literature, all of which imply somewhat pessimistic results:
1. Treaties tend to codify actions that nations were already taking. Or, put
another way, they largely reflect what countries would have done anyway,
and so offer little net improvement.
2. When the number of affected countries is very large, treaties can achieve
very little, no matter how many signatories there are.
3. Cooperation can be hardest to obtain when it is needed the most.
Box 9.1 Conditions conducive to effective cooperation
between nations in dealing with international
environmental problems
The adoption of a leadership role by one
‘important’ nation.
Low uncertainty about the costs and benefits
associated with resolving the problem.
The agreement is self-enforcing.
A large proportion of nation-specific or
localised benefits relative to transnational
benefits coming from the actions of
participating countries.
Continuous relationship between the parties.
The existence of linked benefits.
A small number of cooperating countries.
The short-run cost of implementation is low,
and so current sacrifice is small.
Relatively high cultural similarity among the
affected or negotiating parties.
High proportion of the available benefits are
obtained currently and in the near future.
A substantial concentration of interests
among the adversely affected parties.
Costs of bargaining small relative to gains
The existence of an international political
institution with the authority and power to
construct, administer and (if possible)
enforce a collective agreement.
The output of the international agreement
would yield private rather than public goods.
Other factors conducive to international
environmental cooperation
Role of commitment
• an unconditional undertaking made by an agent about how it will act in the
future, irrespective of what others do.
• credibility of commitments
• one interesting form of commitment is the use of performance bonds
• obtain the benefits of free-riding on the other’s pollution abatement.
Transfers and side-payments
• e.g. signatories offer side-payments to induce non-signatories to enter
Linkage benefits and costs and reciprocity
• may be possible to secure greater cooperation if other benefits are brought
into consideration jointly. Doing this alters the pay-off matrix to the game.
• e.g. international trade restrictions, anti-terrorism measures, health and
safety standards: may be economies of scope available by linking these
various goals.
Figure 9.11 A one shot Prisoner’s Dilemma game
B’s strategy
P, P
T, S
S, T
A’s strategy
Figure 9.12 The two-shot Prisoner’s Dilemma game
B’s strategy
2P, 2P
T+P, S+P
S+P, T+P
A’s strategy
Are players only concerned with
the returns that they get?
Global climate change:
What determines Earth’s climate?
Figure 9.13 Estimate of the Earth’s annual and global mean energy balance
Over the long term, the amount of incoming solar radiation absorbed by the Earth and atmosphere is balanced by the Earth and atmosphere releasing the same amount of
outgoing longwave radiation. About half of the incoming solar radiation is absorbed by the Earth’s surface. This energy is transferred to the atmosphere by warming the air in
contact with the surface (thermals), by evapotranspiration and by longwave radiation that is absorbed by clouds and greenhouse gases. The atmosphere in turn radiates
longwave energy back to Earth as well as out to space. Source: FAQ 1.1, Figure 1.
How would GHG emissions and
atmospheric concentrations change
over the coming century and beyond if
no additional controls were imposed?
Fig 9.14 Global GHG emissions (in GtCO2-eq per year) in the absence of additional
climate policies.
The figure shows six illustrative SRES marker scenarios (coloured lines) and 80th percentile range of recent scenarios published since SRES (post-SRES) (gray shaded area). Dashed
lines show the full range of post- SRES scenarios. The emissions include CO2, CH4, N2O and F-gases.
Source: Figure 3.1, IPCC AR4 Synthesis Report, available online at:
How will climate change over
the coming century and
Figure 9.15 Multi model averages and assessed ranges for surface warming
Options available for mitigating GHG
atmospheric concentrations
There are two ways to move towards a goal of reducing the
rate of growth of atmospheric greenhouse-gas
• increase the capacity of sinks that sequester carbon
dioxide and other greenhouse gases from the
• decrease emissions of greenhouse gases below
business as usual (thereby reducing GHG inflows to the
The costs of attaining GHG emissions or atmospheric
concentration targets: key results
1. The cost of achieving any given target in terms of levels of allowable
GHG emissions or stabilised GHG concentrations increases as the
magnitude of the emissions or concentration target declines.
2. Other things being equal, the cost of achieving any given target
increases the higher are baseline (i.e. uncontrolled) emissions over
the time period in question.
3. The cost of achieving any given target varies with the date at which
targets are to be met, but does so in quite complex ways. It is not
possible to say in general whether fast or early control measures are
more cost-effective than slow or late controls.
More key results
4. There is some scope for GHG emissions to be reduced at zero or
negative net social cost. The magnitude of this is uncertain. It
depends primarily on the size of three kinds of opportunities and the
extent to which the barriers limiting their exploitation can be
– overcoming market imperfections (and so reducing avoidable inefficiencies);
– ancillary or joint benefits of GHG abatement (such as reductions in traffic
– double dividend effects
More key results (2)
5. Abatement costs will be lower the more cost-efficiently that
abatement is obtained. This implies several things:
Costs will be lower for strategies that focus on all GHGs, rather than just CO 2, and are able to find costminimising abatement mixes among the set of GHGs. It is not just carbon emissions or concentrations that
Costs will be lower for strategies that focus on all sectors, rather than just one sector or a small number of
sectors. Thus, for example, while reducing emissions in energy production is of great importance, the equimarginal principle suggests that cost minimisation would require a balanced multi-sectoral approach.
The more ‘complete’ is the abatement effort in terms of countries involved, the lower will be overall control
costs. This is just another implication of the equi-marginal cost principle, and it also is necessary to minimise
problems of carbon (or other GHG) leakage.
The above comments imply that in principle achieving targets at least cost could be brought about by the
use of a set of uniform global GHG taxes. Alternatively, use could be made of a set of freely tradeable net
emissions licenses (one set for each gas, with tradability between sets at appropriate conversion rates), with
quantities of licenses being fixed at the desired cost-minimising target levels.
Climate-change decision-making is essentially a sequential process under
uncertainty. The value of new information is likely to be very high, and so there are
important quasi-option values that should be considered.
Figure 9.16 Global GHG emissions for 2000 and projected baseline emissions for 2030 and 2100 from
IPCC SRES and the post-SRES literature
The figure provides the emissions from the six illustrative SRES scenarios. It also provides the frequency distribution of the
emissions in the post-SRES scenarios (5th, 25th, median, 75th, 95th percentile), as covered in Chapter 3. F-gases cover
HFCs, PFCs and SF6.
Numerical estimates of
mitigation potential and
mitigation costs
Short to medium term GHG mitigation:
estimated mitigation costs for the period
to 2030
Long term GHG mitigation, for
stabilised GHG concentrations:
estimated mitigation costs for the
period after 2050
Figure 9.17
Fig 9.17 (alt version)
Figure 9.17 Emissions pathways of mitigation scenarios for alternative
groups of stabilization targets
Accompanying text:
The pink area gives the projected CO2 emissions for the recent mitigation scenarios developed postTAR. Green shaded areas depict the range of more than 80 TAR stabilization scenarios (Morita et al.,
2001). Category I and II scenarios explore stabilization targets below the lowest target of the TAR.
Source: IPCC (2007), WGIII. (Based on Nakicenovic et al., 2006, and Hanaoka et al., 2006)
Nordhaus DICE-2007 model
• An intertemporal optimisation model of climate change policy.
• Objective function in DICE-2007 is the present value of global
• Damages from GHG emissions reduce consumption possibilities, as
do the costs of GHG abatement.
• Model allows the user to identify emissions abatement choices (the
policy instruments) that maximise the present value of global
consumption, net of GHG damages and abatement costs, over
horizons of up to 200 years or so ahead. Nordhaus calls such a set
of policy choices the ‘optimal’ policy.
Table 9.11: Results of DICE-2007 simulations
(2005 U.S. dollars per ton of carbon)
Figure 9.18 The level of carbon prices (or taxes) through time for various mitigation strategies
Safe minimum standard
(precautionary) approaches.
The large uncertainties which exist in climate change modelling regarding
the damages that climate change could bring about lead many to conclude
that mitigation policy should be based on a precautionary principle.
This would entail that some ‘safe’ threshold level of allowable climate
change is imposed as a constraint on admissible policy choices.
Support for a safe minimum standard approach in the climate change
context has grown in recent years for two main reasons.
First, the science increasingly points to non-linearities in the dose-response function linking
temperature change to induced damages, with damages rising at increasingly large marginal
rates at higher levels of global mean temperatures, and possibly discontinuously.
Secondly, positive feedbacks in the linkage between GHG concentration rates and
temperature responses are increasingly likely to kick-in as atmospheric GHG concentrations
rise, so that the climate sensitivity coefficients rise endogenously.
Figure 9.19
The Kyoto Protocol
Attempts to secure internationally coordinated reductions in GHG emissions
have taken place largely through a series of international conventions
organised under the auspices of the United Nations.
1992 ‘Earth Summit’: Framework Convention on Climate Change (FCCC)
was adopted, requiring signatories to conduct national inventories of GHG
emissions and to submit action plans for controlling emissions.
By 1995, parties to the FCCC had established two significant principles:
emissions reductions would initially only be required of industrialised
countries; second, those countries would need to reduce emissions to
below 1990 levels.
The Kyoto Protocol (2)
Kyoto Protocol: the first substantial agreement to set country-specific GHG
emissions limits and a timetable for their attainment.
To come into force and be binding on all signatories, the Protocol would
need to be ratified by at least 55 countries, responsible for at least 55% of
1990 CO2 emissions of FCCC ‘Annex 1’ nations.
The key objective set by the Protocol was to cut combined emissions of five
principal GHGs from industrialised countries by 5% relative to 1990 levels
by the period 2008–2012.
The Protocol did not set any binding commitments on developing countries.
Subsequent activity
• Since 1997, there have been annual meetings of the parties that
signed the Kyoto Protocol.
• Initially, those meetings were largely concerned with the institutional
structures and mechanisms and ‘rules of the game’ required to
implement the protocol, such as how emissions and reductions are
to be measured, the extent to which CO2 absorbed by sinks will be
counted towards Kyoto targets, and compliance mechanisms.
• The twin conditions required for the Protocol to become operational
were met in early 2005. While the Kyoto Protocol came into force at
that time, it did so without the participation of the USA, thereby
significantly weakening its potential impact.
• The first phase of the Kyoto Protocol will end in 2012.
• Recent meetings of the parties have been concerned with making
preparations for its second phase.
The Kyoto Protocol’s
flexibility mechanisms
These generate incentives for control to take place in sources that have the lowest
abatement costs, and so create the potential for greatly reducing the total cost of
attaining any given overall policy target.
Emissions Trading: Allows emissions trading among Annex 1 countries; countries in which
emissions are below their allowed targets may sell ‘credits’ to other nations, which can add
these to their allowed targets.
Banking Emissions targets do not have to be met every year, only on average over the
period 2008–2012. Moreover, emissions reductions above Kyoto targets attained in the years
2008–2012 can be banked for credit in the following control period.
Joint Implementation: JI allows for bilateral bargains among Annex 1 countries, whereby one
country can obtain ‘Emissions Reduction Units’ for undertaking in another country projects
that reduce net emissions, provided that the reduction is additional to what would have taken
place anyway.
Clean Development Mechanism: By funding projects that reduce emissions in developing
countries, Annex 1 countries can gain emissions credits to offset against their abatement
obligations. Effectively, the CDM generalises the JI provision to a global basis. The CDM
applies to sequestration schemes (such as forestry programmes) as well as emissions
The Kyoto Protocol’s
flexibility mechanisms
Problems: validation of project additionality.
Kyoto’s flexibility mechanisms appear to offer very large prospects of
reductions in overall emissions abatement costs. Studies carried out during
the 1990s found median marginal abatement costs in developed economies
to be of the order of $200 per tonne of carbon.
Barrett (1998) argued that with emissions being uncontrolled in the nonAnnex 1 countries, marginal abatement costs there are effectively zero.
On this basis, he suggests that cost savings from the Clean Development
Mechanism alone could be of the order of $200/tC at the margin.