International environmental agreements with consistent conjectures

Abstract

We introduce consistent conjectures into Barrett (1994) canonical model of international environmental agreements. The existing literature assumes inconsistent Nash conjectures, despite the fact that policymakers recognize that abatement levels are strategic substitutes and increases in abatement generate carbon leakage. With consistent conjectures much of the conventional wisdom is reversed. The non-cooperative abatement level is below the Nash equilibrium. The difference between Nash and consistent conjectures is greatest when benefits are large and costs are small. We find that large coalitions cannot form. However, small coalitions can result in substantial increases in abatement relative to the non-cooperative outcome.