WORLD SCIENTIFIC REFERENCE ON NATURAL RESOURCES AND ENVIRONMENTAL POLICY IN THE ERA OF GLOBAL CHANGE

Transcription

1 WORLD SCIENTIFIC REFERENCE ON NATURAL RESOURCES AND ENVIRONMENTAL POLICY IN THE ERA OF GLOBAL CHANGE Game Theory

2 This page intentionally left blank

3 WORLD SCIENTIFIC REFERENCE ON NATURAL RESOURCES AND ENVIRONMENTAL POLICY IN THE ERA OF GLOBAL CHANGE Editor-in-Chief Ariel Dinar UC Riverside Game Theory Editors Ana Espinola-Arredondo Felix Munoz-Garcia Washington State University, USA World Scientific NEW JERSEY LONDON SINGAPORE BEIJING SHANGHAI HONG KONG TAIPEI CHENNAI TOKYO

4 Published by World Scientific Publishing Co. Pte. Ltd. 5 Toh Tuck Link, Singapore USA office: 27 Warren Street, Suite , Hackensack, NJ UK office: 57 Shelton Street, Covent Garden, London WC2H 9HE Library of Congress Cataloging-in-Publication Data Names: Dinar, Ariel, 1947 editor. Title: The WSPC reference on natural resources and environmental policy in the era of global change / editor-in-chief, Ariel Dinar (UC Riverside) ; edited by Felix Munoz-Garcia (Washington State University, USA), Ana Espinola-Arredondo (Washington State University, USA), Richard A. Matthew (UC Irvine), Tony Bryant (Macquarie University, Australia), Anabela Botelho (University of Aveiro, Portugal). Description: New Jersey : World Scientific, [2016] Contents: Volume 1. Game theory -- Volume 2. The Social ecology of the anthropocene: continuity and change in global environmental politics -- Volume 3. Computable general equilibrium models -- Volume 4. Experimental economics. Includes bibliographical references and index. Identifiers: LCCN ISBN (v. 1 : hc : alk. paper) ISBN (v. 2 : hc : alk. paper) ISBN (v. 3 : hc : alk. paper) ISBN (v. 4 : hc : alk. paper) Subjects: LCSH: Natural resources--environmental aspects. Environmental policy. Environmental economics. Classification: LCC HC85.W DDC dc23 LC record available at British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. Copyright 2017 by World Scientific Publishing Co. Pte. Ltd. All rights reserved. This book, or parts thereof, may not be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage and retrieval system now known or to be invented, without written permission from the publisher. For photocopying of material in this volume, please pay a copying fee through the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA. In this case permission to photocopy is not required from the publisher. Desk Editors: Kalpana Bharanikumar/Philly Lim Typeset by Stallion Press enquiries@stallionpress.com Printed in Singapore

5 Foreword WSPC Reference Set on Natural Resources and Environmental Policy in the Era of Global Change In recent decades we have witnessed amplified (mostly) negative impacts of direct and indirect interactions between humans, natural resources and the environment. Population growth, improved standards of living, changes in preferences and tastes, technological innovations, and progress in communication ability, all make our world more accessible and impacted. Results are overwhelming. Natural resources are being depleted and polluted at increasing rates. Soil and water resources are lost to beneficial uses in many regions of the world due to overexploitation and pollution in the process of food and energy production, and to other uses of these limited natural resources on earth. Forests are deforested due to land conversion for food production and expansion of urban communities. Wars (not necessarily over dwindling resources) send many immigrants across territories adding to the already existing pressure on natural resources and the environment. Progress and technological advancement lead to increased pollution of natural resources, with the most known example of the increased CO 2 level in the atmosphere, leading to climate change and various global public travails. Large-scale and global environmental hazards to human health such as climate change, stratospheric ozone depletion, changes in ecosystems due to loss of biodiversity, changes in hydrological systems and the supplies of freshwater, land degradation, urbanization and stresses on food-producing systems are thereby set in train. All of the above are only examples to the damage-side of some of the globalization aspects associated with our societal progress. Societies are engaged in activities that cause negative externalities to other societies or to parts of the society. In the process of implementing regulation interventions to such global negative consequences we observe cases of resistance, which is very peculiar. It is the reason for strategic behavior, which can lead to various conflicts, domestic and international, between the polluter/extractor and the v

6 vi Foreword victim or the regulation, or among the polluter/extractors themselves, or among the victims themselves. This suggests a strategic behavior pattern that is not simple to understand. How do societies cope with such conflicts? What are the economic consequences of policy interventions designed to cope with overexploitation of natural resources and pollution of the environment? What can social science tell us about alternative approaches to evaluate social dilemmas? The WSPC Reference Set on Natural Resources and Environmental Policy in the Era of Global Change offers a unique perspective on the issues that engage the public discourse of researchers and policy makers at state, regional, national and global levels. Each of the volumes in the reference set and all four volumes as a whole provide coverage of disciplines and angles through which the reader can obtain an understanding of the state-of-theart for dealing with natural resources and environmental policy in the era of global change. The volumes in the reference set complement each other and provide a scientific understanding of our ability to address the issues covered in these volumes. The WSPC Reference on Natural Resources and Environmental Policy in the Era of Global Change provides a gallery of approaches including: Game Theory, International Relations, Computable General Equilibrium (CGE) Economy-Wide Modeling and Experimental Economics. All volumes focus on the economic and strategic aspects of interactions among various parts of society, which are dependent on the availability and utilization of limited natural resources and their impact on the environment. Policy implications are addressed, including current challenges and future perspectives. All four disciplines represented in this set address past, present and future problems in globalization and the natural resources and environment from different angles. Game Theory models highlight the strategic behavior of various players involved in games that determine allocation of resources or their regulation via taxes. International relations approaches take into account human environment interactions with focus on the Anthropocene and how policies can delay or may even reverse the social-ecological systems degradation with focus on inequality (social justice) within and between states. CGE models at regional and global levels address policy interventions, natural and human-made shocks to biological systems in order to assess the interdependence between the various groups, regions, sectors, and the direct and indirect impacts on the economy. And Experimental Economics assesses, using laboratory experiments, situations where the players face externalities, they share (global) public goods, they are engaged in strategic interactions, and they may need to make concessions.

7 Foreword vii The volume on Game Theory provides examples of approaches that help analyze global environmental problems where strategic behavior of the players is an important aspect of the solution process. This volume includes coverage of global natural and environmental problems, such as common property resources (renewable resources, fisheries), transboundary pollution regulation (climate change, non-point source pollution), games of establishing, and sustaining international environmental agreements and the role of international trade, games that demonstrate the incentives to invest in new mitigation and abatement technologies, and games describing static and dynamic phenomena. The volume on International Relations addresses the challenge in the Anthropocene where the social-ecological system may face collapse sooner or later, and lead to strife and turmoil in the absence of policy intervention. It focuses on adaptive responses and human justice at the state or interstate levels. It analyzes the process that led to the Anthropocene, with focus on biological, hydrological and climatic processes and governance structures and their ability to impact the human ecological interphase; examples for possible collaborative systems that may lead to effective human environmental policies to manage conflict and disaster in the human environment interphase, taking into account power within and between societies and justice include perceptions, communications, partnership and recovery. They are demonstrated using several ecological systems, such as food, water, energy and climate change. The volume on Computable General Equilibrium (CGE) Modeling addresses aspects of economy-wide considerations at the regional and global level that are associated with global forces, such as trade and CO 2 pollution, and extractions of natural resources and their impact on the global economy, under static, dynamic, deterministic, and uncertain conditions. Specific issues include sectoral aspects such as energy, trade, water, health and food. Chapters on specific environmental and resource issues with regional implications include CO 2 emission control in Latin America and the Caribbean, effects of current EU biofuel quotas on agricultural prices, and impacts of China s carbon cap-and-trade Policy. The volume on Experimental Economics presents the methods used in the field to analyze behavior of agents in the management of global commons. The chapters in the volume present strategic, deterministic and stochastic forces that affect the natural resources system, and stock and flow resources, which also affect the effectiveness of the policy that can be considered by the regulator. One important aspect that the Experimental Economics volume addresses and evaluates is the irreversibility of damage to ecological systems.

8 viii Foreword Experiments in the volume address: common pool resource management with and without communication; endogenous institutional arrangements and their effectiveness in promotion of cooperation of the management of the resource; effectiveness of cost-sharing regimes in the case of wildfire risk mitigation; role of uncertainty in promoting cooperative behavior for management of public goods (bads); the role of extraction quotas to prevent regime shifts of common pool resource ecological systems; the role of risk and time preferences in the context of climate change regulations; and the role of new auction format for European Union emission trading system. Together, all four volumes recognize the challenge our society faces and make several suggestions for future research and policy work. Several conclusions overlap and can be extracted from the four volumes: first, strategic behavior and inclusion of as-wide-as possible system of players are essential to understanding the interactions that prevail in global interactions of humans extracting natural resources and environmental regulations; second, understanding local and small-scale systems may shed light and help in evaluating policies and interactions of global phenomenon; third, understanding past patterns of cause and effect is essential for assessing future policy interventions; fourth, there is much similarity between regional patterns of policy effectiveness that can be extrapolated, once the local conditions are controlled, and thus regional studies have much value even if they do not cover the global setup. On behalf of all volume editors and myself, it is our hope that this Reference Set on Natural Resources and Environmental Policy in an Era of Global Change will open new avenues for research ideas and interdisciplinary collaboration. Ariel Dinar, Professor of Environmental Economics and Policy, School of Public Policy, University of California, Riverside, USA; Editor-in-Chief, WSPC Reference on Natural Resources and Environmental Policy in the Era of Global Change.

9 Contributing Authors Alain-Désiré Nimubona University of Waterloo, Canada Amrita Ray Chaudhuri The University of Winnipeg, Canada Anastasios Xepapadeas Athens University of Economics and Business, Greece André Grimaud Université de Toulouse, France Anthony Heyes University of Ottawa, Canada Bernard Sinclair-Desgagné HEC Montréal, Canada Bogdan Urban University of Ottawa, Canada Charles F. Mason University of Wyoming, USA; London School of Economics, England; University of Southern Denmark, Denmark Charles Figuières University of Osnabrück, Germany Edward B. Barbier University of Wyoming, USA Estelle Midler University of Osnabrück, Germany Francisco J. André Universidad Complutense de Madrid, Spain Hassan Benchekroun McGill University, Canada Kathleen Segerson University of Connecticut, USA Luca Lambertini University of Bologna, Italy Luc Rouge Université de Toulouse, France Megan Bailey Dalhousie University, Canada Ngo Van Long McGill University, Canada ix

10 x Contributing Authors Niels Vestergaard University of Southern Denmark, Denmark Solveig Delabroye École polytechnique, France Ussif R. Sumaila University of British Columbia, Canada Vassiliki Manoussi Athens University of Economics and Business, Greece Victoria I. Umanskaya Occidental College, USA

11 Introduction Global environmental problems such as climate change and global warming call for a joint response from governments, international organizations, nongovernmental organizations and people all over the world. However, like in a big orchestra, it requires a huge deal of negotiation and coordination to achieve a satisfactory solution for everybody. In musical terms, a symphony needs a harmonious combination of elements to make it memorable and pleasant to all types of audiences. Game Theory, in this respect, becomes a powerful tool to examine negotiations that involve cases in which an agent (or several agents) is affected by the action of other individual(s) in the economy. In fact, Game Theory has become an important tool to examine and evaluate strategic behavior in environmental and resource economics. For instance, Google Scholar nowadays produces more than 744,000 entries under the name Game Theory and Environmental Economics. This book examines several approaches to global environmental problems, focusing on the strategic behavior of different agents in the economy. A main objective of the book is to provide to the reader a current and fresh discussion of the state of the art in applied Game Theory and bring new approaches to the strategic study of environmental issues. It also discusses different policy implications that are derived from the game theoretic models. Such policy recommendations are a valuable starting point for policy makers that usually face a tradeoff between the gains from ameliorating the negative effects of global environmental externalities, such as transboundary pollution, and the losses from firms profits due to more demanding technologies or a reduction in their output level. Thirteen chapters provide a broad discussion about the strategic analysis of different environmental issues that range from polluted non-renewable resources to the negative effects of international trade on the environment. Specifically, the first two chapters examine the strategic management of xi

12 xii Introduction common pool resources (e.g., fishing grounds and aquifers) and discuss the challenges that the independent decisions of those exploiting the resource impose on others. Transboundary pollution is also examined, considering a dynamic evolution of the stock of the pollutant. Other chapters consider specific technological solutions to climate change and provide a thoughtful discussion about non-point source (NPS) pollution. The book, in addition, includes an analysis about the strategic role of environmental non-governmental organizations (NGOs) in inducing polluters to adjust their behavior. The use of natural resources by several polluting firms that operate in an oligopoly is also examined, considering different environmental policies that help to correct such an externality. Furthermore, it provides a particular solution to solve the problem of global deforestation, analyzing the negotiation process of several countries. Technology change and investment in research and development is studied in two different chapters which focus on how environmental policy affects firms strategic behavior when deciding on their investment levels. International environmental agreements as a solution to global environmental problems are also discussed in a chapter that focuses on the implementation of clean technologies. Finally, the last chapter provides a comprehensive discussion of the literature s use of differential games on environmental economics. Below we provide a more detailed summary of each chapter, grouped into different topics. COMMON-PROPERTY RESOURCES The first two chapters of the book analyze environmental problems affecting common pool resources. Specifically, Chapter 1 by Megan Bailey, Niels Vestergaard and Ussif Rashid Sumaila (from Dalhousie University, University of Southern Denmark and University of British Columbia, respectively) discusses the history of global fisheries as a prisoner s dilemma game. It provides several examples that will help the reader understand the complexities of cooperative management between fishing countries. The chapter examines the asymmetric information about the stock of the common pool resource that regional fishery management organizations face. It identifies a set of problems that hinders the ability of these organizations to achieve cooperative management. Finally, it also examines asymmetric information using the principal agent approach in which fisheries often privately observe real catches and their costs, leaving the regulator (e.g., regional fishery management organizations) uninformed. The second chapter, developed by Hassan Benchekroun (from McGill University), provides an overview of the literature on the exploitation of

13 Introduction xiii a renewable resource by a finite number of firms. In this context, each firm s payoff is not only affected by its own exploitation of the resource but also by other firms exploitation. The chapter focuses on models in which firms interact in a oligopolistic market. In addition, it explicitly identifies a renewable resource oligopoly model and examines the impact of (1) unilateral restraints from exploitation; (2) privatization of the resource; and (3) firms with different extraction costs. CLIMATE CHANGE, TRANSBOUNDARY POLLUTION AND NPS POLLUTION In Chapter 3, Vassiliki Manoussi and Anastasios Xepapadeas (from Athens University of Economics and Business) examine two climate change policies: (1) mitigation and (2) geoengineering (i.e., methods to block or reflect solar radiation). Their study develops a model that allows countries to jointly use both types of policies. The analysis focuses on cooperative and non-cooperative solutions and provides several comparisons. The results suggest that greenhouse gas accumulation is higher under geoengineering, and that under a context of non-cooperation, countries have more incentives to undertake geoengineering. Chapter 4 by Charles Mason and Edward Barbier (University of Wyoming) and Victoria Umanskaya (Occidental College) analyzes a unidirectional negative pollution externality generated by the production of an imported good. A general Pigouvian tax cannot be applied in this case since there is no effective international governing body to impose it. Hence, the second-best solution is to levy a tariff on imported goods. The authors further the literature by modeling a dynamic process, including an analysis of how the stock of pollutants evolves across time. They find that the optimal tariff is based on the time discount rate, the rate of natural depletion of the stock of pollution, as well as the level of stock itself. In addition, the chapter provides an example using a linear quadratic specification. The assumption of unidirectional pollution is relaxed at the end of the chapter, allowing pollution to affect the producing country as well. Chapter 5 by Kathleen Segerson provides an overview of NPS pollution at a domestic and international context. It analyzes a standard model of NPS pollution in order to identify the socially optimal level of emission. The chapter also discusses two types of policies to reduce NPS pollution: (1) tax-based policies and (2) voluntary approaches, such as environmental conditionality whereby agricultural subsidies are only provided if the farmers undertake conservation measures. Finally, it examines the NPS

14 xiv Introduction pollution under an international context, focusing on the case of water pollution. NATURAL RESOURCE MANAGEMENT Anthony Heyes and Bogdan Urban (from University of Ottawa) in Chapter 6 provide a well-structured discussion about the different approaches of the literature on the strategic interaction between polluting firms and environmentally conservative NGOs. The chapter presents how their algebraic expressions can be applied to several real world examples. Chapter 7 by Luca Lambertini (from University of Bologna) examines the existing literature on oligopoly games that considers a natural resource as an input and where emissions are generated by the supply of the good. In addition, it develops a model using a differential game based on the Cournot oligopoly. Specifically, the model examines two policies: (1) an emission tax and (2) regulation of market access (number of firms exploiting the resource), and subsequently compares them in terms of their effects on social welfare and on the extraction of the natural resource. Charles Figuières and Estelle Midler (from INRA-Montpellier and University of Osnabrück, respectively) analyze in Chapter 8 a deforestation model based on Figuieres et al. (2012). The objective of the chapter is to analyze the effectiveness of the Reducing Emissions from Deforestation and Forest Degradation (REDD+) mechanism in which developed countries (North) compensate underdeveloped countries (South) if the observed rate of deforestation is below a baseline level. Specifically, it studies two different institutional scenarios that resemble those observed in REDD+. First, it discusses a sequential setting in which North countries decide their funding and then the UN chooses the baselines related to the deforested area in the South countries. The second case is a simultaneous context, in which North countries and the UN decide at the same time funding and baseline, respectively. They identify cases in which the sequential Stackelberg setting performs worse than the simultaneous context, in terms of both funding and social welfare. ENVIRONMENTAL POLICY AND INNOVATION Chapter 9 by André Grimaud and Luc Rouge (from Toulouse School of Economics and Université de Toulouse, respectively) discusses the literature measuring the impact of climate policies using general equilibrium models with endogenous growth. Specifically, it examines how certain economic policies such as (1) carbon taxes, (2) research and development subsidies

15 Introduction xv and (3) carbon capture and storage subsidies affect the resource use, carbon emissions, production and growth. The chapter also offers a discussion about the applicability and implications of such policies in the real world. Francisco André (from Universidad Complutense de Madrid) examines in Chapter 10 the different theoretical contributions related to the Porter Hypothesis. In particular, the Porter Hypothesis postulates that environmental policy can have positive effects on firms profits, since such regulation fosters innovation of cleaner goods and processes; as originally discussed by Porter (1990) and Porter and van der Linde (1995). This chapter identifies and thoughtfully discusses the main criticisms about the Porter hypothesis. It provides a well structured analysis of the different points of view that the literature offers to this line of study. INTERNATIONAL ENVIRONMENTAL AGREEMENTS AND INTERNATIONAL TRADE Chapter 11 developed by Hassan Benchekroun and Amrita Ray Chaudhuri (from McGill University and University of Winnipeg, respectively) discusses the effect of clean technology on the size of stable environmental agreements. It provides a comprehensive discussion of the existing literature and summarizes the main elements of the model developed in Benchekroun and Ray Chaudhuri (2014a, 2014b). In addition, it provides numerical examples that facilitate the understanding of the results. In Chapter 12, Solveig Delabroye (École polytechnique-paris), Alain- Désiré Nimubona (University of Waterloo) and Bernard Sinclair-Desgagné (HEC Montreal) study the environmental goods and services industry (such as pollution mitigation and management), and the difficulty to reach a sustainable trade agreement reducing tariffs across several countries. The chapter focuses on the asymmetric incentives of developed and underdeveloped countries to participate in these agreements, which could explain the relative failure of trade negotiations; except for the one adopted in 2012 at the Asia Pacific Economic Cooperation summit. DIFFERENTIAL GAMES AND ENVIRONMENTAL ECONOMICS Finally Ngo Van Long (from McGill University) provides a comprehensive and a step-by-step discussion about the application of differential games to global natural resources and environmental problems. The chapter discusses an example that helps the reader better understand the difference between the solution concept of open-loop Nash equilibrium and Markov-perfect

16 xvi Introduction Nash equilibrium. It also provides three applications related to: (1) global pollution, (2) the unregulated use of antibiotics and (3) the shallow lake problem that describes a highly nonlinear model in which there are several steady state equilibria. Ana Espinola-Arredondo and Felix Munoz-Garcia

17 Foreword Contributing Authors Introduction Chapter 1. Chapter 2. Chapter 3. Chapter 4. Contents Overcoming Principal Agent Problems to Improve Cooperative Governance of Internationally Shared Fisheries 1 Megan Bailey, Niels Vestergaard and U. Rashid Sumaila Common Property Resource Exploitation under Imperfect Competition 29 Hassan Benchekroun Mitigation and Solar Radiation Management in Climate Change Policies 51 Vassiliki Manoussi and Anastasios Xepapadeas On the Strategic Use of Import Tariffs to Control Trans-Boundary Externalities 93 Charles F. Mason, Victoria I. Umanskaya and Edward B. Barbier Chapter 5. Non-Point Source Pollution in an International Context 115 Kathleen Segerson v ix xi xvii

18 xviii Contents Chapter 6. Chapter 7. Chapter 8. Game Theoretic Modeling of Environmental NGOs in an International Context 139 Anthony Heyes and Bogdan Urban On the Interplay between Resource Extraction and Polluting Emissions in Oligopoly 169 Luca Lambertini Deforestation and REDD+: Taking Stock of the Latest Institutional Possibilities 191 Charles Figuières and Estelle Midler Chapter 9. Climate Policies, Technical Change and R&D 209 André Grimaud and Luc Rouge Chapter 10. Strategic Behavior and the Porter Hypothesis 231 Francisco J. André Chapter 11. Chapter 12. Chapter 13. Transboundary Pollution, Clean Technologies and International Environmental Agreements 263 Hassan Benchekroun and Amrita Ray Chaudhuri International Trade and the Environmental Goods and Services Industry 295 Solveig Delabroye, Alain-Désiré Nimubona and Bernard Sinclair-Desgagné Differential Games: Solution Concepts and Applications to Global Resources and Environmental Problems 329 Ngo Van Long Index 361