Self-enforcing climate-change treaties

Abstract

In the absence of world government, an effective treaty to control the emissions of greenhouse gases should be self-enforcing. A self-enforcing treaty has the property that, if a country expects other countries to abide by the treaty, it will be in the self-interest of that country to abide by the treaty too. (A difficulty with the Kyoto Protocol is that it does not appear to lay the groundwork for a self-enforcing treaty). A self-enforcing treaty can be modeled as a Nash equilibrium of a suitably defined dynamic game among a large number of sovereign countries of diverse sizes and economic capabilities. We study such a game and characterize its equilibria (typically there are many) and the global-Pareto-optimal solutions. We identify one of the equilibria, which we call "business as usual," with the current situation. The multiplicity of equilibria provides an opportunity to move from the inefficient business-as-usual equilibrium to one or more equilibria that are Pareto-superior. Using a calibrated model with 184 countries, we give numerical illustrations of business-as-usual and global-Pareto-optimal trajectories and estimate the potential welfare gains from a self-enforcing treaty.