Climate Change Policy and Game Theory. Martin Sewell [email protected] E3 Foundation & 4CMR. Rapid Decarbonisation Project: Workshop 3 London 21 September 2011. Economics of CO 2 emissions. The burning of fossil fuels releases CO 2 into the atmosphere.
The burning of fossil fuels releases CO2 into the atmosphere.
CO2 is a greenhouse gas that contributes to global warming.
Therefore the burning of fossil fuels reduces global social utility.
We have a market failure, CO2 emissions being a negative externality.
A hypothetical global government would seek to correct the market failure by taxing CO2 emissions.
Typically, the emissions from burning fossil fuels within a nation have only a minor negative impact on national social utility, but a nation suffers significantly from emissions due to the rest of the world also burning fossil fuels.
So, individual nations have little incentive to tax CO2 emissions, but the world as a whole would be better off if all nations taxed emissions.
Human-induced climate change is a classic case of the tragedy of the commons (Hardin 1968)—the benefits of burning fossil fuels accrue to individuals, companies and nations, whilst the costs accrue to the planet as a whole.
Disadvantages of unilateral cooperation
Motivating a reduction of fossil fuel consumption on anything other than a global scale will not only be less effective, but may create perverse incentives: if those countries that burn fossil fuels the most efficiently cut back, more of the remaining fossil fuels will be used up by those countries that burn fossil fuels less efficiently, leading to greater overall emissions.
Disadvantages of multilateral cooperation
Trying to bring all countries into a binding international agreement to reduce emissions at this time makes little sense because such agreements are extremely difficult to achieve and impossible to enforce.
Disadvantages of defection
Humans are very efficient cheater detectors, and apt at identifying and punishing freeloaders.
Should the US government commit to greenhouse gas reductions?
source: Holladay, Horne and Schwartz (2009)
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