Coalitions and Side Payments in International CO2 Treaties

Abstract

Most numerical studies analysing the costs and benefits of international CO2 emissions abatement assume full cooperation by all countries and regions in the world. Based on the experience from the 1992 Rio conference on the one side, and the theory of self-enforcing agreements to restrict pollution among sovereign countries on the other, full cooperation will probably not be the outcome of an international treaty on reducing CO2 emissions. In this study we focus on coalitions and side payments in international CO2 treaties by answering questions such as: Given the commitment of cooperation by a defmed group of countries, what is the optimal policy of the group? What is the global loss of partial cooperation compared to full cooperation (social optimum), and how is the optimal abatement level affected by the number of countries committed to cooperate? The framework of the analysis is as follows. A group of OECD countries have committed themselves to cooperate on the global warming problem.. The coalition (or the cooperating countries) chooses emission levels and offer the non-cooperating countries transfers if they restrict their emissions. The abatement and side payments made by the coalition are chosen so that its intertemporal utility function is maximised. Compared to the social optimum, limited participation implies a significant global loss. However, compared to doing nothing, a treaty signed by a group of counties may be important. Side payments are an effective policy instrument for making a limited treaty significant.