Sharing R&D investments in cleaner technologies to mitigate climate change

This paper examines international cooperation on technological development as an alternative to international cooperation on GHG emission reductions. It is assumed that when countries cooperate they coordinate their investments so as to minimize the agreement costs of controlling emissions. Further it is assumed that in such cases they also pool their R&D efforts so as to fully internalize the spillover effects of their investments in R&D. In order to analyze the scope of cooperation, an agreement formation game is solved in three stages. First, countries decide whether or not to sign the agreement. Then, in the second stage, signatories (playing together) and non-signatories (playing individually) select their investment in R&D. Finally, in the third stage, each country decides on its level of emissions non-cooperatively. For linear environmental damages and quadratic investment costs, our findings show that the maximum participation in a R&D agreement consists of six countries and that participation decreases as spillover effects increase until a minimum participation consisting of three countries is reached.     

Global environmental problems and the strategic choice of technology

Reductions of environmentally harmful emissions are often a public good in a global context. For strategic reasons, countries may adopt a technology with high per unit cost of emission reduction, even if a technology with lower per unit cost is available at no extra cost. They thereby credibly commit themselves to not reducing emission much in the future. In a game of private voluntary provision of emission reduction, this commitment will make other countries increase their emission reductions. Also, in the case where countries cooperate in the future, such commitment gives a country a strategic advantage, because it shifts the disagreement point in a favorable direction.     

Co-operation and Unilateral Commitment in the Presence of Global Environmental Problems

This paper focuses on the link between group co-operation and unilateral commitment of some countries in the presence of global environmental problems. We show that in case of a failure of negotiation, some countries can decide to commit unilaterally and reduce their emissions. We call this behaviour precautionary commitment. Absence of international agreement does not mean global defection from the environmental issue.We also show that the emergence of a non-co-ordinatedglobal co-operation can result from a strategic actionfrom the members of the coalition. The insiders of the coalition create an incentive for the non-members to reduce without co-ordinating their emissions.     

International Environmental Permit Trade and Debt: the Consequences of Country Sovereignty and Cross-Default Policies*

We investigate the joint occurrence of international intertemporal trade and international environmental-permit trade, both of which are subject to country sovereignty. Assuming that side payments cannot be made to keep a debtor country from terminating international environmental cooperation, we analyze the impact of these two trade opportunities on a debtor country's incentive to continue environmental cooperation. We also show how, by way of a suitable strategic linkage between debt and permit trade, the public good of ensuring continued environmental cooperation can be provided by the supply side of private international loans.     

International environment conventions: The case of uniform reductions of emissions

Several serious environmental problems have a global character. International cooperation to reduce emissions for this type of problems often takes the form of an agreement among the cooperating countries to cut back emissions by a uniform percent rate compared with some base year. This type of agreements has two disadvantages. In the first place, it is well known from environmental economics that equal percentage reductions of emissions from different sources usually gives an inefficient outcome, in the sense that the same environmental goals could be achieved at lower costs through a different distribution of emission reductions. A second problem with agreements of equal percentage reductions is that not all countries will find it in their interest to participate in such agreements. In the paper, it is assumed that the set of countries which participate in an agreement is endogenously determined, with a country participating in an agreement provided that this makes the country better off than it would have been in a situation without any agreement. The agreement among the participating countries is assumed to be a uniform percentage reduction of their emissions. The countries have different opinions about what this uniform percentage should be. In the paper, it is assumed that the outcome is determined by the median country of the participating countries. The assumptions above lead to a particular equilibrium, in which some but not all countries cooperate. The equilibrium reduction of emissions for the cooperating countries is also derived. This equilibrium compared with the first best optimum within the context of simple numerical example.Presented at the conference Environmental Cooperation and Policy in the Single European Market, Venice, April 16–20, 1990. The paper is part of the research project Energy and Society at the Centre for Research in Economics and Business Administration (SNF), Oslo. I am grateful to Ignazio Musu and Henk Folmer for useful comments on an earlier version of the paper.     

The Incentives for North-South Transfer of Climate-Mitigation Technologies with Trade in Polluting Goods

The need to transfer climate mitigation technologies towards the developing world has been acknowledged since the beginning of climate negotiations. Little progress has however been made, as shown by Article 10 of the Paris Agreement. One reason is that these technologies could become vital assets to compete on global markets. This paper presents a partial equilibrium model with two regions, the North and the South, and imperfect competition in the international polluting goods market, to analyze the North’s incentives to accept technology transfer. Results crucially depend on the existence of environmental cooperation. When both northern and southern governments set emission quotas non-cooperatively, inducing fewer global emissions is a necessary, but not sufficient condition for the North to accept the transfer. In contrast, when governments set quotas cooperatively, the North has no incentive to share its technology either before or after the agreement. Technology transfer commitments may be included in the agreement, but with no effect on global emissions and global surplus. The only impacts are distributional, technology transfers and side payments may be substitute instruments.     

International Cooperation on Climate-friendly Technologies

We examine international cooperation on technological development as an alternative to international cooperation on emission reductions. We show that without any R&D cooperation, R&D in each country should be increased beyond the non-cooperative level if (i) the technology level in one country is positively affected by R&D in other countries, (ii) the domestic carbon tax is lower than the Pigovian level, or (iii) the domestic carbon tax is set directly through an international tax agreement. We also show that a second-best technology agreement has higher R&D, higher emissions, or both compared with the first-best-outcome. The second-best subsidy always exceeds the subsidy under no international R&D cooperation. Further, when the price of carbon is the same in the second-best technology agreement and in the case without R&D cooperation, welfare is highest, R&D is highest and emissions are lowest in the second-best R&D agreement.     

How does the design of international environmental agreements affect investment in environmentally-friendly technology?

In this paper, we investigate how the design of international environmental agreements (IEAs) affects the incentives for the private sector to invest in environmentally-friendly technology. The givens are a transboundary pollution problem involving two asymmetric countries in terms of benefits arising from global abatement. There is a single polluting firm in each country. We account for two types of IEAs: an agreement based on a uniform standard with transfers and an agreement based on differentiated standards without transfers. To carry out this study, we use a two-stage game where the private sector anticipates its irreversible investment given the expected level of abatement standards resulting from future negotiations. Our findings indicate that the implementation of the agreement based on a uniform standard with transfers may be preferable for the two countries, as it creates greater incentives for firms to invest in costly abatement technology. This result arises when this technology’s level of the sunk cost of investment is low. If this level is sufficiently high, the implementation of the same agreement is not beneficial to countries, because it takes away the incentive of each firm to invest in new abatement technology. Moreover, this agreement is not able to generate any positive gains for either country through cooperation, thus no country is motivated to cooperate.     

On enhanced cooperation

We analyze the issues relative to the formation of sub-unions in a federation, called enhanced cooperation agreements in the European Union. When centralization is not politically feasible, an agreement among a subset of countries may allow such countries to exploit benefits from coordination that would otherwise be lost. Other countries in the federation may object to the sub-union because it changes the status quo; if cooperation at the federal level becomes convenient in the future, the change in the status quo may adversely affect the countries which remained initially outside the sub-union. We show that as long as the countries can commit to coordinate on a policy which takes into account the utility of the excluded countries, sub-union formation may be optimal. The relative advantage of a sub-union towards immediate centralization increases when transfers are costly. On the other hand, if commitment is not possible then the excluded countries may be penalized. We use the results to discuss the newly introduced rules for enhanced cooperation agreements in the European Union.     

A Dynamic Model for International Environmental Agreements

In this paper we develop a model that uses a dynamic framework to analyze the process through which countries join international environmental agreements (IEAs). In the model, while all countries suffer from the same environmental damage as a result of total global emissions, non-signatory countries decide on their emission levels by maximizing their own welfare, whereas signatory countries decide on their emission levels by maximizing the aggregate welfare of all signatory countries. It is assumed that signatory countries will be able to punish non-signatories, at some cost to themselves. When countries decide on their pollution emissions, they account for the evolution of the stock of pollution over time. Moreover, we propose a mechanism to describe how countries reach a stable IEA. The model is able to capture situations characterized by partial cooperation within an IEA that is stable over time. It also captures situations where all countries participate in a stable agreement, and situations where no stable agreement is feasible. Where more than one possibility coexist, the long-term outcome of the game depends on the initial conditions (i.e., the initial number of signatory countries and pollution level).     

Hot air for sale: a quantitative assessment of Russia’s near-term climate policy options

Since January 2005 the European Union has launched an EU-internal emissions trading scheme (EU ETS) for emission-intensive installations as the central pillar to comply with the Kyoto Protocol. The EU ETS will be linked to a Kyoto emissions market where greenhouse gas emission allowances of signatory Kyoto countries can be traded. In this paper we investigate the implications of Russian market power for environmental effectiveness and regional compliance costs to the Kyoto Protocol taking into account potential linkages between the Kyoto emissions market and the EU ETS. We find that Russia may have incentives to join the EU ETS as long as the latter remains relatively separated from the Kyoto international emissions market. In this case, Russia can exert monopolistic price discrimination between two separated markets thereby maximizing revenues from hot air sales. The EU will be able to substantially reduce compliance costs if it does not restrain itself to EU-internal emission regulation schemes. However, part of the gains from extra-EU emissions trading will come at the expense of environmental effectiveness as (more) hot air will be drawn in.      

Income based price subsidies and parallel imports

We present a policy game where a Rich country has a higher ability than a Poor country to commit to certain elements of health policy such as providing income related price subsidies and allowing parallel imports (PI). When allowing PI is not a choice for the Poor country, the Rich country allows PI and both countries provide a subsidy to their poorer buyers as the subgame perfect equilibrium policies. However, when the Poor is able to PI a different equilibrium may arise. We show that the ability of the Poor to allow PI might increase welfare in this country even if it is never implemented. We also prove that as the Poor country gets richer, it will not be in their best interest to sign an agreement with the Rich to commit to not allowing PI.     

Income based price subsidies and parallel imports

We present a policy game where a Rich country has a higher ability than a Poor country to commit to certain elements of health policy such as providing income related price subsidies and allowing parallel imports (PI). When allowing PI is not a choice for the Poor country, the Rich country allows PI and both countries provide a subsidy to their poorer buyers as the subgame perfect equilibrium policies. However, when the Poor is able to PI a different equilibrium may arise. We show that the ability of the Poor to allow PI might increase welfare in this country even if it is never implemented. We also prove that as the Poor country gets richer, it will not be in their best interest to sign an agreement with the Rich to commit to not allowing PI.     

Climate Policy,Learning, and Technology Adoption in Small Countries

A significant reduction in global greenhouse gas emissions requires international cooperation in emission abatement as well as individual countries’ investment in the adoption of abatement technology. The existing literature on climate policy pays insufficient attention to small countries, which account for a substantial proportion of global emission. In this study, we investigate how climate policy and learning about climate damage affect investment in abatement technology in small countries. We consider three alternative climate policy instruments: emission standards, harmonized taxes and auctioned permits. We say that learning is feasible if an international environmental agreement (IEA) is formed after the resolution of uncertainty about climate damage. We find that, either with learning and quadratic abatement costs or without learning, harmonized taxes outperform emission standards and auctioned permits in terms of investment efficiency. Without learning, a large cost of nonparticipation (that a country incurs) in the IEA can be beneficial to the country. Whether learning improves investment efficiency depends on the size of this nonparticipation cost.     

The Welfare Synergy of Bundling International Environmental Agreements with International Trade Treaties

This paper examines whether linking environmental cooperation with international trade agreements improves the welfare of the participating countries and allows countries to move closer to free trade compared with trade‐only agreements. The model is an infinitely repeated game with the threat of reversion to Nash equilibrium if an economy deviates from the cooperative agreement. It is found that such a synergy exists in a symmetric two‐country model with two goods, both emitting pollutants even when the externalities have local impact. A combination of analytic and numerical simulation analysis is used to derive the conclusions.     

Free-Riding and Cooperation in Environmental Games

This paper examines the negotiation of an international environmental agreement in which different countries determine the (nonenforceable) promises of investment in clean technologies to be included in the agreement. Furthermore, it analyzes countries' optimal investment in emission-reducing technologies, considering that, in addition to the utility that a country perceives from an improved environmental quality, it is also concerned about the relative fulfillment of the terms specified in the international agreement either by itself or by others. I show, first, why countries may prefer to shift most promises of investment in clean technologies to other countries, despite the fact that these promises are usually nonenforceable by any international organization. Second, I determine countries' optimal investments in these technologies, and analyze how their particular investments depend on how demanding the international agreement is, and on the importance that countries assign to each others' relative fulfillment of their part of the treaty.     

Games of Climate Change with International Trade

We analyse games of greenhouse gas emission reduction in which the emissions and the emission reduction costs of one country depend on other countries' emission abatement. In an analytically tractable model, we show that international trade effects on costs and emissions can either increase or decrease incentives to reduce emissions and to cooperate on emission abatement; in some specifications, optimal emission reduction is unaffected by trade. We therefore specify the model further, calibrating it to larger models that estimate the costs of emission reduction, trade effects, and impacts of climate change. If trade effects are driven by total emission reduction costs of other countries cooperation is slightly more difficult than in the case without trade effects. If trade effects are determined by relative emission reduction efforts in other countries, cooperation becomes easier. Carbon leakage does not affect our qualitative insights, although it does change the numbers.     

Informational Benefits of International Treaties

International treaties allow a minister in one country to learn about the beliefs held by a minister in another country, so allowing each to make better decisions. When the net benefits of environmental policy are uncertain, a country which participates in negotiating an environmental treaty, or which supports strong environmental action, thereby provides information to another country that such action can be worthwhile. This dimension of international environmental agreements helps explain why countries negotiate treaties, why these treaties often implement the Nash non-cooperative equilibrium, why agreement to a treaty by a country deemed not particularly favorable to it can strengthen environmental action, and why treaties may invoke a minimum participation clause. The informational mechanism we discuss holds even if physical spillovers are absent, and even if monitoring and enforcement are infeasible. Our approach can explain additional phenomena: how requirements for approval by several bodies within a country can increase support for a policy, and why simultaneous action can lead to better outcomes than sequential action.     

The Stabilisation of LDCs' Export Earnings. The impact of the EU STABEX programme

As part of the Lome Convention the STABEX programme is one of the instruments of the European Union's development policy. Its objective is to reduce the instability of the agricultural export earnings of the developing countries which signed the agreement. By working on a commodity-by-commodity basis, this paper provides an empirical evaluation of the effects of the financial transfers disbursed by the EU. The results obtained are substantially different from those by other authors because it is shown that STABEX does have a positive impact on the sectors in which the drop of export earnings occurred. Furthermore, it is argued that the delay concerning the payments in favour of the African Caribbean and Pacific countries (henceforth ACPs) influences the effectiveness of STABEX, even if no conclusive evidence has been found to support the widely shared opinion that the relationship between these two variables (impact of the transfers and their delays) is negative.