Strategic Interactions and Uncertainty in Decisions to Curb Greenhouse Gas Emissions

Abstract

This paper examines the strategic interactions of two large regions making choices about greenhouse gas emissions in the face of rising global temperatures. Three central features are highlighted: uncertainty, the incentive for free riding, and asymmetric characteristics of decision makers. Optimal decisions are modelled in a fully dynamic, feedback Stackelberg pollution game. Global average temperature is modelled as a mean reverting stochastic process. A numerical solution of a coupled system of Hamilton-Jacobi-Bellman equations is implemented and the probability distribution of outcomes is illustrated with Monte Carlo simulation. When players are identical, the outcome of the game is much worse than the social planner’s outcome. An increase in temperature volatility reduces player utility, making cooperative action through a social planner more urgent. Asymmetric damages or asymmetric preferences for emissions reductions are shown to have important effffects on the strategic interactions of players.