Equity, Heterogeneity and International Environmental Agreements

Transcription

1 Equity, Heterogeneity and International Environmental Agreements Charles D. Kolstad University of California, Santa Barbara and RfF and NBER 1

2 IEAs Groups of countries voluntarily band together to abate pollution No overarching authority to enforce With global public good, often better to be on the outside looking in (better in fringe) Some theoretical literature on forming IEAs Some experimental literature on voluntary coalitions to provide environmental goods 2

3 Typical Questions How big will an IEA be (# participants)? How much better off is everyone as a result of IEA (as opposed to no cooperation)? How can IEAs be structured to strengthen and increase welfare? Does uncertainty undermine or strengthen IEAs? How can lessons be brought to bear on real IEAs, such as Kyoto/FCCC? 3

4 Motivation for Today s Talk We are gathered here to consider Distributional Aspects of Energy and Climate Policy Internationally, does the unequal distribution of benefits and costs of climate policy matter? [Homogeneity = equity; heterogeneity = unequal.] Do differences among countries (heterogeneity of countries) promote or retard the formation of IEAs? Does heterogeneity promote global welfare in presence of IEAs? Can theoretical results be brought to bear on real problems? 4

5 Some prior results i=1,,n countries Payoff: Π i = q i γq Where: q i = emissions (0 or 1); Q = total emissions by all countries; γ = marginal damage from emissions relative to abatement costs (costs normalized to 1) (γ < 1) Two-stage game: countries play a IEA membership game followed by an emissions game Unique IEA with n*=1/γ members [higher γ smaller IEA] Aggregate payoff with IEA = - (Nγ - 1) 2 /γ [higher γ lower payoff] IEA size and payoff inversely related 5

6 Uncertainty and Heterogeneity Hypothesis: if you are a country, not knowing your γ can facilitate cooperation (Young) Three stage game Membership game (uncertain about type) Uncertainty resolved Emissions game (certainty about type) Theory: Uncertainty ambiguous can increase size of an IEA or can be neutral, depending on parameter values 6

7 Coalition Size Experiments (from Burger & Kolstad, 2009) Coalition (MPCR = 0.6) Coal. w /uncert. (MPCR = 0.6) Coalition (MPCR = 0.3) Coal. w /uncert (MPCR = 0.3) Period 7

8 Coalition Size Experiments (from Burger & Kolstad, 2009) Theory tells us higher MPCR (γ) leads to smaller coalitions Coalition (MPCR = 0.6) Coal. w /uncert. (MPCR = 0.6) Coalition (MPCR = 0.3) Coal. w /uncert (MPCR = 0.3) Period 8

9 Simple Theoretical Model of Heterogeneity Two types of countries, 1 and 2 γ 1 < γ 2 Number of countries: N 1, N 2 with N=N 1 +N 2 Coalition: (n 1,n 2 ) Coalition emission decision: Abate: W=-n 1 [γ 1 (N-n 1 -n 2 )] n 2 [γ 2 (N-n 1 -n 2 )] = -(n 1 γ 1 + n 2 γ 2 ) (N-n 1 -n 2 ) Pollute: W= (n 1 +n 2 ) n 1 γ 1 N n 2 γ 2 N Abate weakly preferred iff n 1 γ 1 + n 2 γ 2 1 Stable coalitions where n 1 γ 1 + n 2 γ 2 = 1 Fringe always pollutes 9

10 Graphically n 1 γ 1 + n 2 γ 2 = 1 (locus of stable coalitions) n 2 Optimal for coalition to abate and for individual countries to defect to fringe. Optimal for coalition to pollute n 1 10

11 Equilibrium Refinement Too many possible coalitions Focus on the one which gives the greatest overall welfare (in aggregate for all countries) not a trivial refinement! W = - (N-n 1 -n 2 ) (N 1 γ 1 + N 2 γ 2-1) Maximize subject to n 1 γ 1 + n 2 γ 2 = 1 n 1 as large as possible; typically, n 2 =0 n 1 = 1/γ 1 11

12 Add heterogeneity Assume γ 1 = γ δ/n 1 γ 2 = γ + δ/n 2 For δ 0, N 1 γ 1 + N 2 γ 2 = N γ ie, we can adjust the heterogeneity (δ), keeping the weighted average γ constant Question: what happens as δ is increased from 0? 12

13 Comparative Statics Assume case that coalition is only type 1 countries Increase in δ increases size of IEA Welfare W = [N-1/(γ - δ/n 1 )] (Nγ - 1) Differentiate W wrt δ and dw/dδ >0 increased heterogeneity leads to: Increased IEA size Increased aggregate welfare for society 13

14 An Application US Govt Proposed Fuel Economy Reg Social cost of carbon = $20/ton, global; $1.20 per ton for US EPA analyses of GHG legislation is US Congress yields $13/ton marginal cost of abatement γ =0.09 n*=11 14

15 Reality doesn t fit the theory but Think of two sets of countries Developed and developing Developing countries Lower abatement cost Lower marginal damage γ? Suggestion of theory is that we are better off having two blocs of countries rather than a set of homogeneous countries with same average γ 15

16 Conclusions Heterogeneity does seem to matter to formation of IEAs Heterogeneity appears to favor larger IEAs and higher welfare Further work needs to be done Refining theoretical model Developing empirical implications Testing theory (experimentally?) 16