Sustainable International Agreements on Greenhouse Warming — A Game Theory Study

Abstract

Atmospheric concentrations of the greenhouse gases (e.g., CO₂) are increasing rapidly due to human economic and industrial activity. The thermal balance of the earth is changed resulting in overall climate warming referred to as the “greenhouse effect”. The greenhouse effect is a global issue. Reducing damages caused by climatic changes requires major international efforts. Many countries bear the view that the joint efforts should be undertaken under international agreements. We present a dynamic game theory model for an international environmental negotiation problem that may arise in the context of global climate change. Our game theory setting is based on the fact that the countries differ in their vulnerability to the global warming and that two coalitions will possibly be formed. One coalition may include countries that do not suffer from global warming, or where the damages are minor, and in the other coalition we may have countries that suffer from the global warming. The greenhouse problem is modelled as an economic infinite-horizon differential game. The players negotiate an agreement among Pareto efficient programs. Since the costs of one player will be reduced in cooperation while the costs of the other will increase, transfer payments may be used in negotiating an agreement. Transfer payment programs are designed such that it is possible at any stage of the agreement to punish violations against cooperation and to discourage the other player from selfishly polluting the atmosphere. The use of memory strategies in designing self-enforcing agreements is discussed. The main conclusion is that the incentives for international cooperative control of global warming will become stronger with an accelerating speed.