Kai Lessmann

Self-enforcing strategies to deter free-riding in the climate change mitigation game and other repeated public good games

As the Copenhagen Accord indicates, most of the international community agrees that global mean temperature should not be allowed to rise more than two degrees Celsius above preindustrial levels to avoid unacceptable damages from climate change. The scientific evidence distilled in the Fourth Assessment Report of the Intergovernmental Panel on Climate Change and recent reports by the US National Academies shows that this can only be achieved by vast reductions of greenhouse gas emissions. Still, international cooperation on greenhouse gas emissions reductions suffers from incentives to free-ride and to renegotiate agreements in case of noncompliance, and the same is true for other so-called “public good games.” Using game theory, we show how one might overcome these problems with a simple dynamic strategy of linear compensation when the parameters of the problem fulfill some general conditions and players can be considered to be sufficiently rational. The proposed strategy redistributes liabilities according to past compliance levels in a proportionate and timely way. It can be used to implement any given allocation of target contributions, and we prove that it has several strong stability properties.

The Stability and Effectiveness of Climate Coalitions: A Comparative Analysis of Multiple Integrated Assessment Models

We report results from a comparison of numerically calibrated game theoretic integrated assessment models that explore the stability and performance of international coalitions for climate change mitigation. We identify robust results concerning the incentives of different nations to commit themselves to a climate agreement and estimate the extent of greenhouse gas mitigation that can be achieved by stable agreements. We also assess the potential of transfers that redistribute the surplus of cooperation to foster the stability of climate coalitions. In contrast to much of the existing analytical game theoretical literature, we find substantial scope for self-enforcing climate coalitions in most models that close much of the abatement and welfare gap between complete absence of cooperation and full cooperation. This more positive message follows from the use of appropriate transfer schemes that are designed to counteract free riding incentives.

Signaling in international environmental agreements: the case of early and delayed action

This paper presents a stylized international environmental agreements game with two regions differing in their preference for environmental quality. If side payments are allowed, cooperation can increase the payoffs accruing to both regions. However, cooperation can be impeded by asymmetric information about the regions’ types and only become feasible once a region has credibly revealed its type. We show how in a two-stage game early (delayed) action can act as a credible signal to reveal private information on high (low) benefits. Yet, the cooperative solution with asymmetric information is Pareto-dominated by the outcome with perfect information.

Influence of Distributional Shape of Substance Parameters on Exposure Model Output

Uncertainty of environmental concentrations is calculated with the regional multimedia exposure model of EUSES 1.0 by considering probability input distributions for aqueous solubility, vapor pressure, and octanol-water partition coefficient, K(ow). Only reliable experimentally determined data are selected from available literature for eight reference chemicals representing a wide substance property spectrum. Monte Carlo simulations are performed with uniform, triangular, and log-normal input distributions to assess the influence of the choice of input distribution type on the predicted concentration distributions. The impact of input distribution shapes on output variance exceeds the effect on the output mean by one order of magnitude. Both are affected by influence and uncertainty (i.e., variance) of the input variable as well. Distributional shape has no influence when the sensitivity function of the respective parameter is perfectly linear. For nonlinear relationships, overlap of probability mass of input distribution with influential ranges of the parameter space is important. Differences in computed output distribution are greatest when input distributions differ in the most influential parameter range.

Infrastructure and Inequality: Insights from Incorporating Key Economic Facts about Household Heterogeneity

We study the trade-off between equity and growth in the context of tax-financed investment in public capital. Taking into account stylized facts on wealth accumulation, we model agent heterogeneity through differences in saving behavior, income source and time preference. In contrast to the results of studies that introduce heterogeneity through different initial endowments only, we find that under our heterogeneity assumptions an equity-efficiency trade-off does not necessarily occur. We show that a consumption tax or a capital tax, levied to finance public capital, does not increase inequality. In our model capital tax-financed public investment has even an inequality-reducing effect - thus allowing for Pareto-improving public investment that decreases inequality. Additionally we find that agents differ in their preferred tax rates. These results are valid for both, the case of endogenous growth and the case of steady state convergence and do not require the assumption of an identical rate of pure time preference across all households.

How empirical uncertainties influence the stability of climate coalitions

International climate agreements are negotiated in the face of uncertainties concerning the costs and benefits of abatement and in the presence of incentives for free-riding. Numerical climate coalition models provide estimates of the challenges affecting cooperation, but often resort to assuming certainty with respect to the values of model parameters. We study the impact of uncertainty on the stability of coalitions in the Model of International Climate Agreements using the technique of Monte Carlo analysis. We extend the existing literature by (1) calibrating parametric uncertainty about damages and abatement costs to estimates from meta-studies and by (2) explicitly considering uncertainty in the curvature of the damage function. We find that stability is more sensitive to uncertainty in damages than in abatement costs and most sensitive to uncertainty about the regional distribution of damages. Our calculations suggest that heterogeneity can increase stability of coalitions; however, this depends on the availability of transfers.

The climate rent curse: new challenges for burden sharing

The literature on the “resource curse” has strongly emphasized that large incomes from resource endowments may have adverse effects on the growth prospects of a country. Conceivably the income generated from emission permit allocations, as suggested in the context of international climate policy, could have a comparable impact. Effects of a “climate rent curse” have so far not been considered in the design of permit allocation schemes. In this study, we first determine when to expect a climate rent curse conceptually by analyzing its potential channels. We then use a numerical model to explore the extent of consequences that a climate rent curse would have on international climate agreements. We show that given the susceptibility to a curse, permit allocation schemes may fail to encourage the participation of recipient countries in an international mitigation effort. We present transfer schemes that enhance cooperation and limit adverse effects on recipients.

Climate Policy in a Decentralised World

Lengthy international climate negotiations indicate a great difficulty to agree on a global climate policy. This chapter discusses the prospect of global climate policy in the context of game theoretic literature on international environmental agreements. Since a global authority with power to enforce a global policy is lacking, international policy has to resort to self-enforcing agreements of sovereign nation states. Game theoretic research has shown that this results in a social dilemma with strong incentives to free-ride, and difficulty in achieving cooperation. But it has also outlined possible ways forward that may foster greater participation in an international climate agreement.

Mobilizing domestic resources for the Agenda 2030 via carbon pricing

The twenty-first century is characterized by an underprovision of basic public goods, such as public health, education, infrastructure and so on, and an overuse of the atmosphere as disposal space for greenhouse gases. Carbon pricing could address both problems simultaneously: a transition from negative carbon prices (fossil fuel subsidies) to positive levels could generate revenues to finance progress towards the Sustainable Development Goals. Given the scarcity of private sources of finance in many lower-income countries, carbon pricing could be a particularly attractive policy option. Our analysis identifies countries where domestic revenues from carbon pricing consistent with the 2 °C target could contribute substantially to financing the Sustainable Development Goals.A shift away from fossil fuel subsidies to carbon pricing could generate revenues to finance progress towards the Sustainable Development Goals. This Perspective shows that in many low-income countries, as private sources of finance are limited, revenues from carbon taxes could be a particularly attractive policy option for financing the SDGs.

LEADERSHIP IN CLIMATE CHANGE MITIGATION: CONSEQUENCES AND INCENTIVES

Initiatives in favor of unilateral action on climate change are frequently challenged by concerns over free riding. Nevertheless, we observe an increasing number of unilateral efforts at different administrative levels and in different parts of the world. Previous academic literature described various individual mechanisms where emissions abroad may increase or decrease as a reaction to unilateral emission reductions. In this paper, we collect a comprehensive set of both positive and negative reactions and analyze them in stylized models. This allows us to identify the most important characteristics that determine the potential of a leader to boost mitigation efforts abroad. We find that this potential depends on (i) a strong ability to generate knowledge through leadership, (ii) a high degree of credibility in the international community, and (iii) a similar economic structure to the most important emitters. While most effects are difficult to quantify, this comprehensive assessment suggests that leakage effects resulting from unilateral mitigation may well be outweighed by positive reactions.