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Policy linkages and international cooperation on climate change: Who cares about the economic burden of the environment?

Final Report Summary - INTCOP21 (Policy linkages and international cooperation on climate change: Who cares about the economic burden of the environment?)

The project INTCOP21 aimed at shedding light on some relevant aspects of the relationship between the increasing economic inter-connections between countries, and the international provision of global public goods such as climate stability. The idea was to contrast with the existing literature on international cooperation that mostly assumes that countries’ environmental policies are substitutable or even independent. Instead, the approach proposed aimed at considering in deep the fundamentals of strategic interactions between countries. The alternative assumption was that unilateral emission reductions by a set of countries can create self-interested emission reductions in other countries. In a context of laissez-faire, the propositions established in a first paper shed light on the evolution of the problem of greenhouse gas (GHG) accumulation in the atmosphere for each type of strategic behaviour resulting from countries’ interconnection on global markets. In a framework of strong economic interdependencies, they show the potential consequences of the free trade arrangements on the environment and question the idea that free-trade liberalisation should necessarily lead to an increase in countries’ welfare. This paper provides an exhaustive typology of countries’ strategic behaviours and a strong static comparative analysis with regard to the exogenous parameters of the model. Whereas some assumptions tend to be less relevant from an environmental point of view; others very relevant have not yet been considered in the literature. This paper generalizes the existing results of the literature and determines new equilibria not yet exploited. It thus extends the current framework of the traditional public economic theory dealing with public goods.
A second objective of the project was to study the inter-linkage between environmental policy, i.e. policy implemented to abate GHG emissions; and countries incentives to invest in R&D (R&D aiming at reducing abatement costs or R&D in energy-saving technologies). The aim was to highlight what was the influence of R&D investments and technology diffusion among countries on their incentives to implement stronger environmental policies. With regard to the existing literature, this point was achieved modifying the way technology spill-overs among countries through the concept of absorptive capacity. The underlying idea is that a country must itself invest in R&D to be able to grasp the fruit of R&D of the other countries. This approach has been shown to be more in line with empirical evidences on technology diffusion around the world. Using a general approach (general payoff functions) we were able to provide a generalization of several results of the existing literature dealing with this question. The preliminary results show that the dependence of absorptive capacity on own R&D raises the effectiveness of own R&D but lowers effective spillovers, thus reducing the disincentive to invest in R&D because of un-appropriable spillovers. More importantly, a central assessment is that, if strategies in emissions are substitutable (positive carbon leakage), an increase in one country’s R&D expenditures can lead to a decrease in the others’ individual emission levels. The condition for it to happen is that the spillover parameter is higher than a minimum threshold. In other words, allowing for technical change modifies the nature of interactions between countries in terms of polluting behaviours: if the diffusion of clean technologies among countries in enough important, it becomes possible to observe reinforcement effects in the implementation of countries’ environmental policy.
Finally beyond the theoretical outcome, the enclosed objective of the research was to confront the results of the theory with experimental data. In an experimental setting, groups of seven subjects played one of five treatments designed to capture the potential of first-mover investments in catalysing cooperation in a threshold public goods game. The game setup mimics the trade-offs faced by countries choosing to what degree to transition from incumbent polluting technologies to cleaner alternatives, with the overall commitment dictating whether they manage to avert dangerous climate change. We compare the outcome of different parameterizations in terms of first-mover benefits (and extent of spillovers to others) to a benchmark treatment, where subjects played a public goods game without the option to form a coalition of early movers. We find that innovation promotes group-wide cooperation, but non-linearly in the amount of spillovers. When the fringe can partake in the benefits of coalition investments in the innovative technology, and thus reduce emissions at a lower cost, a modest increase in the return to B translates into significantly more investment in it. However, this beneficial effect of knowledge diffusion on the fringe’s contribution ceases when the increased returns to B are more substantial, in which case cooperation is best sustained if they are fully appropriated by the coalition of investors, even if the others shirk. This finding uncovers a shifting relationship between coalition and fringe investments in the public good, in a setup which requires the two groups to coordinate efforts on an ambitious target: while in-group cooperation by early adopters and out-group cooperation by the followers are complements for a large productivity gap between technologies and positive spillovers, primary involvement by a subgroup of subjects is necessary. Yet the latter are a lot less numerous when R&D spills to non-members.
As a whole this research was essential to tackle the provision of global public goods. The latter is one of the new challenges of the twenty-first century. Recognizing the existence of such goods and securing their provision at an international level are central for promoting the well-being of humanity.

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