Ulrike Kornek

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.

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.

A Framework for Assessing the Performance of Cap-and-Trade Systems: Insights from the European Union Emissions Trading System

The performance of the European Union (EU) Emissions Trading System (ETS) and other cap-and-trade schemes has been under scrutiny because of their inability to create a stable price for greenhouse gas emissions. This article seeks to inform the often confusing debate about the economic performance of cap-and-trade systems over time, with a focus on the EU ETS. Based on a simple intertemporal framework of emissions trading and a review of the literature, we show that different frameworks and notions of efficiency result in both different assessments of performance and different recommended strategies for improving performance. More specifically, we argue that if cap-and-trade systems have temporal flexibility (i.e., they include banking and borrowing of emissions allowances), it can be highly misleading to base the economic assessment on short-term efficiency. We seek to draw attention to the concept of long-term economic performance, which takes into account the intertemporal nature of emissions trading systems. In particular, we identify market and government distortions (e.g., myopia, lack of policy credibility, excessive discounting) that may depress allowance prices and hamper intertemporal efficiency. We then examine whether the recently adopted Market Stability Reserve and the alternative price collar are likely to address these distortions.

Bottom-up linking of carbon markets under far-sighted cap coordination and reversibility

The Paris Agreement relies on nationally determined contributions to reach its targets and asks countries to increase ambitions over time, leaving open the details of this process. Although overcoming countries’ myopic ‘free-riding’ incentives requires cooperation, the global public good character of mitigation makes forming coalitions difficult. To cooperate, countries may link their carbon markets1, but is this option beneficial2? Some countries might not participate, not agree to lower caps, or not comply to agreements. While non-compliance might be deterred3, countries can hope that if they don’t participate, others might still form a coalition. When considering only one coalition whose members can leave freely, the literature following the publication of refs 4,5 finds meagre prospects for effective collaboration6. Countries also face incentives to increase emissions when linking their markets without a cap agreement7,8. Here, we analyse the dynamics of market linkage using a game-theoretic model of far-sighted coalition formation. In contrast to non-dynamic models and dynamic models without far-sightedness9,10, in our model an efficient global coalition always forms eventually if players are sufficiently far-sighted or caps are coordinated immediately when markets are linked.Meeting mitigation targets requires domestic action and international cooperation. This study uses game-theoretic modelling to understand carbon-market linkages and to show the conditions that facilitate global coalition formation.

Publisher Correction: Bottom-up linking of carbon markets under far-sighted cap coordination and reversibility

In the PDF version of this Article originally published, in equation (6)

From climate finance toward sustainable development finance

g^{\prime}_{i}

Transferable and non transferable utility implementations of coalitional stability in integrated assessment models

gi′ was incorrectly formatted as gi′, and at the end of the Methods section wi was incorrectly formatted as wi. These have now been corrected.