Economics of International Environmental Agreements

Abstract

International Environmental Agreements (IEAs) respond to transnational environmental problems associated with the use of environmental resources such as, for example, water resources in international river basins, transboundary oil and gas fields, fisheries in international waters or harvesting of migratory fish, and also transboundary pollution of water and air. An important strand of the literature deals with international climate agreements focusing on reduction of emissions of greenhouse gases. In general, IEAs address transboundary externalities and international public goods. Economic analyses of IEAs have employed game theory to explore the scope for international cooperation to resolve transboundary problems. Game theory considers the strategic situation that decision makerss face. A game specifies players, their strategies, and their payoffs under any possible course of action. It is generally assumed that players will act rationally, seeking to maximize their payoff. Although it is obvious that international cooperation can bring about huge gains through coordinated management of resources and efficient pollution control, individual free-riding behavior of countries or regions may block effective cooperation. Hence, game theory is employed in many studies to analyze strategic incentives for participation in IEAs. Empirical work deals with case studies to explain or analyze particular agreements or employs behavioral experiments to explore how institutional designs impact cooperation.