Asymmetry, optimal transfers and international environmental agreements

Science in 2008 to advance public and private action on climate change through innovative, rigorous research. The Centre is funded by the UK Economic and Social Research Council and has five inter-linked research programmes: 1. Developing climate science and economics 2. Climate change governance for a new global deal 3. Adaptation to climate change and human development 4. Governments, markets and climate change mitigation 5. The Munich Re Programme-Evaluating the economics of climate risks and opportunities in the insurance sector established by the London School of Economics and Political Science in 2008 to bring together international expertise on economics, finance, geography, the environment, international development and political economy to create a world-leading centre for policy-relevant research and training in climate change and the environment. The Institute is funded by the Grantham Foundation for the Protection of the Environment, and has five research programmes: 1. Use of climate science in decision-making 2. Mitigation of climate change (including the roles of carbon markets and low-carbon technologies) 3. Impacts of, and adaptation to, climate change, and its effects on development 4. Governance of climate change 5. Management of forests and ecosystems This working paper is intended to stimulate discussion within the research community and among users of research, and its content may have been submitted for publication in academic journals. It has been reviewed by at least one internal referee before publication. The views expressed in this paper represent those of the author(s) and do not necessarily represent those of the host institutions or funders. This paper applies optimal sharing rules to a coalition formation game with positive externalities, demonstrating the effectiveness of well-designed transfer schemes in improving outcomes for participation in International Environmental Agreements. A numerical exercise is conducted, providing proof of the failure of the conventional transfer schemes (Shapley value, Nash bargaining solution, Chander Tulkens transfer scheme) to meet the existence, robustness and optimality conditions set by the optimal sharing rule literature. The core result is derived from a systematic analysis of the effect that the degree of full, mean-preserving asymmetry on the formation of stable self-enforcing coalitions, under two different conditions: transfers and no transfers. The effectiveness of, and participation in, International Environmental Agreements is found to increase with the degree of asymmetry under the optimal sharing rule. Carmen Marchiori, this paper has greatly benefitted from their comments and thoughts. All errors and omissions are my own.