Posted by: Tobias | August 29, 2008

Climate change game theory

More thoughts on global warming (please tell me when I start boring you with this stuff):

I just read one of the seminal papers in the field, that describing William Nordhaus’ RICE model that I really should have read earlier. The model is a regional version of his DICE integrated assessment model which models both the economic and the climate system and incorporates all feedbacks between the two. Roughly an increase in economic activity causes increases in greenhouse gas emissions, those additional greenhouse gasses cause the temperature to rise and that higher temperature reduces consumption via a damage function.

In the RICE-incarnation of the model, Nordhaus divides the world up into 10 ‘regions’ – the US, the EU, India, China and groups of other countries which are roughly similar to each other – and then models their CO2 emissions given some assumptions about their future population growth and economic development over the next 200 years (assumptions that never stop looking silly to me given the time frame involved, however many of these models I read about).

What’s interesting about the model is that the regional disaggregation allows him to look at several different policy scenarios. He runs three:

  1. A business-as-usual scenario in which emissions continue unabated. No carbon tax, no restrictions, nada
  2. A non-cooperative solution in which there is no international agreement on restricting the emission of greenhouse gasses. In this case countries engage in abatement to the point where the marginal cost of abatement equals their own private marginal benefit of that abatement
  3. A cooperative solution in which countries coordinate internationally to reduce their emissions to the optimal level, so until the marginal cost of abatement all over the world is equal to the global marginal benefit.

Now, as anyone who has ever seen these public good games will be able to imagine, abatement levels in the non-cooperative solution fall far short of those in the cooperative solution (1/25th is the number Norhaus calculates). But what struck me as interesting is that some countries actually spend quite a bit of money on reductions even in the non-cooperative case. These countries are simply so large that they bear a considerable part of the damage that their greenhouse gas emissions cause themselves and so it pays for them to reduce these emissions.

Now, I’d always seen the international coordination efforts as some huge game with 180 players, all with their own, often diametrically opposed interests and therefore thought there wasn’t a snowball’s chance in hell we would ever end up with an effective and efficient treaty. But as stupid as that sounds in retrospect, I’d never considered that some of the 180 players are vastly larger than others. At the moment, only a handful of players (the EU, US, China, India and Russia) contain not only a majority of the world’s population but a great majority of GrossWorldProduct. But if this is so, then a treaty just between a few of these players may be considerably easier to hash out than one amongst the full plenum.

Now, all of this neglects a couple of things: for one, abatement under this scheme would still be wildly inefficient precisely because many of the countries in which abatement is cheapest (poor, relatively technologically backward countries) would not be part of the cooperative group and I think there’s hardly a chance we’ll see the kinds of massive transfers necessary to induce them to join. What’s more (and probably more important), the other countries (which Nordhaus lovingly abbreviates as ROW – rest of the world) will contain an ever growing share of people and output on this planet and, even assuming the current big-5 get it together will still leave us with loads and loads more CO2 in the atmosphere than is optimal. Lastly, China and India have so far shown precious little interest in joining such an international agreement and that will probably continue to be the case for some time. But if these countries continue to grow current rates they may soon be rich enough to be able to afford to care.

All in all, this leaves me a bit less depressed about the prospect of successful climate change policies.

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Responses

  1. Don’t bother: you aren’t boring me at all. Only thing is that I am acting as a sponge and won’t be able to contribute.
    Interesting that the result of your post had the opposite effect on my than it had on you: by the time the big polluters start to really care and find an agreement I wouldn’t be surprised if it will be too little too late. Hopefully it is my pessimistic side showing up and I will be wrong once again đŸ˜‰


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