Abstract
We examine long-run treaties for mitigating climate change. Countries pay an initial fee into a global fund that is invested in long-run assets. In each period, part of the fund is distributed among the participating countries in relation to the emission reductions they have achieved in this period suitably rescaled by a weighting factor. We show that a suitably selected refunding scheme implements the globally optimal reductions of greenhouse gases in all periods as a unique subgame perfect equilibrium. The country-specific initial fees can be chosen to engineer a Pareto improvement and to ease participation. We also show that any planned abatement path as e.g. the one envisioned by the Paris Agreement in 2015 can be implemented by an appropriately chosen refunding scheme. Finally, we suggest ways for countries to raise money for the payment of initial fees that are neutral to tax payers and international capital markets.
Highlights
International treaties on the provision of global public goods are plagued by the fundamental free-riding problem: each country’s contribution will benefit all countries in a non-exclusive and non-rival manner
We suggest that even large coalitions can achieve substantial emission reductions if they are able to set up an agency that has the power to administer a refunding scheme on which coalition members have previously agreed
In order to analyze the potential of an refunding scheme (RS) to mitigate climate change, we proceed as follows: First, assuming that all countries participate in the RS in step one, we show that for any feasible set of initial fees f0i and refunds Rt and any time horizon T < ∞ there exists a unique and symmetric subgame perfect Nash equilibrium for steps two and three
Summary
International treaties on the provision of global public goods are plagued by the fundamental free-riding problem: each country’s contribution will benefit all countries in a non-exclusive and non-rival manner. We determine the amount of initial fees that induces convergence to the long-run desired stock We call such a scheme second-best sustainable RS, as countries do not choose socially optimal abatement levels in all periods, in the long run the abatement levels and the stock of GHGs will converge to the social optimum. Both treaties provide a sustainable solution for the climate change problem. In the first-best sustainable RS, refunds can be adjusted so that countries choose socially optimal abatement levels in each period, whereas in the second-best sustainable RS, initial fees are chosen in such a way that the countries’ emission abatement levels will converge to the socially optimal levels in the long run.
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