Equity, Heterogeneity and International Environmental Agreements

Much of the literature on international environmental agreements (IEA) considers the case of identical countries. There is a much smaller literature concerning the more complex but more realistic case of country heterogeneity. This paper involves modifying the standard static homogeneous country model of international environmental agreements (IEA). In particular, we consider two types of countries, differing in size as well as in marginal damage from pollution. Although the IEA does not have a unique size in this case, we do introduce two equilibrium refinements and explore the implications for coalition size. The two refinements include one based on efficiency and one based on equity. ∗Department of Economics and Bren School of Environmental Science & Management, University of California, Santa Barbara; University Fellow, Resources for the Future; Research Associate, National Bureau of Economic Research. Comments from Scott Barrett, Don Fullerton, Ross Mohr, an anonymous referee and participants at an RFF/University of Chicago workshop in January 2010 are much appreciated. The 2009 stalemate at COP-15 in Copenhagen regarding taking action on climate change illustrates the difficulties in getting nearly 200 countries to agree to act on anything, let alone on an issue as complex and significant as climate change. 1 The challenge faced by the participants at Copenhagen was to forge an international environmental agreement (IEA) to reduce greenhouse gas emissions leading to climate change. What makes the problem particularly tough is that countries cannot be forced to participate but must do so voluntarily. And because a reduction in greenhouse gases is truly a global public good, while abatement is privately costly, it is far more attractive to free-ride on any agreement than to participate as an abating party. From an incentive point of view, the only stable agreement is one for which every participant finds it individually rational to participate; that is, participation makes the country better off than free-riding. The issue of the formation of IEAs has also been of concern to the academic community for some time, both in political science (eg, Young 1994) and economics (eg, Barrett 2003). The main question asked by this literature is what characteristics of the problem lead to strong or weak IEAs? A corollary to this question is what structural features can be incorporated into IEAs to improve their performance? Although the political science literature is more nuanced than the economics literature in generating understanding of IEAs, the economics literature has provided many insights into how IEAs work. One of the first papers in this literature is due to Scott Barrett (1994). In that paper, he develops a simple game-theoretic model and argues that IEAs are unable to improve very much on the status quo of no agreement: either agreements involving very many parties are not stable or, if large agreements can be formed, they do not improve welfare much relative to the case of no agreement. Other questions/issues include the effect of uncertainty on IEA formation 2 and the use of commitment mechanisms to strengthen agreements. 3 This paper raises the question of the effect of heterogeneity of countries on the formation of agreements. Simply put, is it easier for a meaningful agreement to form when countries are similar or when they are not? Do differences among countries retard or enhance the formation of IEAs? Does heterogeneity increase abatement and thus welfare? Implications are important for improved design of an IEA. 1 COP-15 is the fifteenth “Conference of the Parties” to the Framework Convention on Climate Change treaty. 2 On uncertainty, see Na and Shin (1998), Helm (1998), Kolstad (2005), Ulph (2004) and Kolstad and Ulph (2008). 3 On commitment, see Carraro and Siniscalco (1993) and Barrett (1997b). 1 Kolstad: Equity, Heterogeneity and IEAs Published by The Berkeley Electronic Press, 2010 Intuition suggests that if countries are very similar, it may be easier to reach agreement to solve a common problem, and thus homogeneity can increase efficiency. It turns out that this intuition is correct.