Peter J. Wood. Resource Management in Asia Pacific Program Research School of Pacific and Asian Studies The Australian National University

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1 Global climate change architecture: comparing blueprints from Australia and China, from a game theory perspective Peter J. Wood Resource Management in Asia Pacific Program Research School of Pacific and Asian Studies The Australian National University Canberra, June 16

2 Outline 1. The problem of achieving international cooperation to reduce emissions 2. Some Australian and Chinese Proposals for Allocating Emissions

3 1. The problem of achieving international cooperation to reduce emissions

4 Climate Change as a Prisoner s Dilemma The payoffs for an example of a prisoner s dilemma game can be expressed using the following table: Abate Pollute Abate 3, 3 1, 4 Pollute 4, 1 2, 2 Climate change can be thought of as a prisoner s dilemma. Each country has an incentive to pollute, regardless of what other countries do. The non-cooperative equilibrium has every country continuing to pollute.

5 The Present Situation An international environmental agreement is a mechanism for transforming the Prisoner s Dilemma into a different game Annex 1 countries negotiate over their targets via the UNFCCC Ad Hoc Working Group on Further Commitments for Annex I Parties under the Kyoto Protocol (AWG-KP) Allocations can be traded Countries have a very strong incentive to try to get the highest allocation possible Makes it difficult for emission reductions to be close to socially optimal

6 The Present Situation National targets give virtually no chance of constraining warming to 2 C and no chance of protecting coral reefs. Rogelj et al., Nature, June 11, 2009

7 The Treaty Participation Game Model s how an international environmental agreement can transform the prisoner s dilemma. Three stages: 1. Every country chooses whether or not to sign a treaty 2. The parties to a treaty choose jointly whether to Abate or Pollute 3. Non-signatories choose independently whether to Abate or Pollute When there are only two players, if both sign a treaty, they will both Abate. This is the optimal outcome. (Barrett 2003) We can also model continuous choices about abatement.

8 Non-optimal outcomes of international agreements For more than two players, and players with different payoff functions: Not all players may sign a treaty Treaties often reflect the least common denominator for emissions reductions by participants The total utility can be significantly less than the fully cooperative social optimum Transfer payments between countries may help to address this Chander and Tulkens (1997) use cooperative game theory to propose a system of transfer payments where countries strongly affected by climate change pay countries with high mitigation costs. Might not be considered to be fair.

9 Fairness and the Ultimatum Game In the ultimatum game, there are two players and a sum of money: the first player proposes how to divide up the sum of money; the second player chooses whether to accept or reject the proposal; if the second player rejects the proposal, neither player receives anything.

10 Fairness and the Ultimatum Game In the ultimatum game, there are two players and a sum of money: the first player proposes how to divide up the sum of money; the second player chooses whether to accept or reject the proposal; if the second player rejects the proposal, neither player receives anything. In the equilibrium, the first player takes (almost) all of the money. In experiments, the second player is unlikely to accept proposals where they receive less than 30% of the money.

11 The Nash Bargaining Solution Two individuals are bargaining. The first individual gains utility of u 1, and the second individual gains utility of u 2. Suppose that we assume that the bargaining solution satisfies Pareto optimality, symmetry, cardinal invariance, and independence of irrelevant alternatives. Nash shows that the bargaining solution point will maximise the product of each individual s utility gain. It will maximise u 1 u 2. Something for everyone Not to be confused with the Nash equilibrium.

12 Bargaining on Emissions Reductions Nash bargaining solution assumes all parties have equal bargaining power Countries bargain over the emission allocations in an international environmental agreement such as the Kyoto Protocol Techniques useful for bargaining (Schelling 1960, 1980): Pre-commitment Promises Threats Above techniques often involve participants changing their payoff structure to strengthen their bargaining position

13 2. Some Australian and Chinese Proposals for Allocating Emissions

14 Garnaut s Modified Contraction and Convergence Approach A modified version of Aubrey Meyer s Contraction and Convergence approach for allocating emissions. All countries eventually allocated the same amount of per-capita emissions

15 Garnaut s Modified Contraction and Convergence Approach Convergence starts in 2013; finishes in Under the 550 ppm CO 2 -e scenario, Australia reduces 2020 emissions by 10% compared to 2000 levels, and reduces 2050 emissions by 80% compared to 2000 levels. Under the 450 ppm CO 2 -e scenario, Australia reduces 2020 emissions by 25% compared to 2000 levels, and reduces 2050 emissions by 90% compared to 2000 levels. Under the 450 ppm CO 2 -e scenario, China will reduce its emissions by 10% compared to business as usual.

16 Australia s Conditions for Accepting a 25% Emissions Reduction by 2020 The Australian Government will take on a 25% reduction (on 2000 levels) by 2020, provided that there is: 1. comprehensive coverage of gases, sources and sectors, with inclusion of forests (e.g. Reducing Emissions from Deforestation and forest Degradation - REDD) and the land sector (including soil carbon initiatives (e.g. bio char) if scientifically demonstrated) in the agreement 2. a clear global trajectory, where the sum of all economies commitments is consistent with 450 ppm CO2-e or lower, and with a nominated early deadline year for peak global emissions no later than advanced economy reductions, in aggregate, of at least 25 per cent below 1990 levels by major developing economy commitments to slow growth and then reduce their absolute level of emissions over time, with a collective reduction of at least 20 per cent below business-as-usual by 2020 and a nominated peak year for individual major developing economies 5. global action which mobilises greater financial resources, including from major developing economies, and results in fully functional global carbon markets

17 Australia s Conditions for Accepting a 15% Emissions Reduction by 2020 The Australian Government will take on a 15% reduction (on 2000 levels) by 2020, provided that: 1. global action on track to stabilisation between ppm CO2-e 2. advanced economy reductions in aggregate, in the range of 15 25% below 1990 levels 3. substantive measurable, reportable and verifiable commitments and actions by major developing economies, in the context of a strong international financing and technology cooperation framework, but which may not deliver significant emissions reductions until after progress toward inclusion of forests (REDD) and the land sector, deeper and broader carbon markets, low carbon development pathways

18 Conditional and Unconditional Targets Having conditional targets if other countries have high enough emissions reductions encourages other countries to increase their emission reductions Australia s unconditional targets also can be thought of as ruling out emissions reductions greater than the target.

19 China s April 2009 Submission All developed country Parties to the Convention shall commit to reduce their GHG emissions by at least 40% below 1990 levels by Given historical responsibility, equity and development stage, the Annex I Parties as a group shall reduce their GHG emissions by at least 40% below 1990 levels by 2020.

20 Carbon Budget Proposal from Professor Jiahua Pan Choose initial year, Y (e.g. 1900). Decide a global carbon budget between Y and 2050 (e.g Gt CO 2 ) Allocate each country a Natural Factors Adjusted Carbon Budget based on its population, but adjusted according to climate variability, geographical area, and resource endowment. Subtract historical emissions from carbon budget, but make sure each country has sufficient budget left for basic needs. Do this through transfers from developing countries to developed countries. This determines the final carbon budget for each country. Non-Annex 1 countries with high projected business as usual emissions pay less transfer payments (China pays no transfer payments).

21 Carbon Budget Proposal from Professor Jiahua Pan With a global carbon budget between 1900 and 2050 of Gt CO 2, Australia would be allocated 3.9 Gt CO 2 between 2000 and Ball-park estimates for Australian allocations using contraction and convergence scenarios and the same carbon budget are: 12.7 Gt CO 2 with a convergence date of Gt CO 2 with a convergence date of Gt CO 2 with a convergence date of Gt CO 2 with a convergence date of 2020

22 Proposal from Professor Yongsheng Zhang Zhang, Y, Greenhouse Gas Emissions: A Theoretical Framework and Global Solution, Economic Research Journal, March 2009 Based on the principle that no country has the right to impose net external emission harm to any others Similar to Jiahua Pan s proposal, but without transfer payments from developing countries to developed countries

23 Production versus Consumption Accounting? It has been suggested that emissions allocations should be based on consumption of goods, rather than production of gases (Pan et al, Oxford Review of Economic Policy, Volume 24, Number 2, 2008, pp ) May be less carbon leakage with consumption based accounting But more complex, difficult to account for historical emissions

24 Carbon Leakage A successful international agreement must have strong incentives against non-compliance and non-participation Restrictions on trade and border adjustments provide a mechanism for discouraging non-participation and noncompliance The possibility of carbon leakage adds credibility to threats to use trade measures While leakage frustrates unilateral efforts to protect the shared environment, it assists multilateral cooperation. (Barrett 2003, p320)

25 Blueprints from China and Australia Frameworks such as Carbon Budget Proposal and Contraction and Convergence provide a long term incentive for countries to reduce their emissions A 25% reduction on 2000 emissions from Australia by 2020 may not be considered by developing countries to be a fair contribution to a global agreement that stabilises greenhouse gas concentrations at 450 ppm CO 2 -e

26 Kevin Rudd on Fairness and Climate Change There is an alternative vision. that sees Australia taking the lead on global climate change, rather than continuing to play the role of saboteur. The time has well and truly come for a vision for Australia not limited by the narrowest of definitions of our national self-interest. Instead, we need to be guided by a new principle that encompasses not only what Australia can do for itself, but also what Australia can do for the world. Kevin Rudd, Faith in Politics, The Monthly, No. 17, October 2006