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H2020

IEA Report Summary

Project ID: 706620
Funded under: H2020-EU.1.3.2.

Periodic Reporting for period 1 - IEA (International Environmental Agreements -An Integrated Approach)

Reporting period: 2017-07-01 to 2019-06-30

Summary of the context and overall objectives of the project

The study of International Environmental Agreements (IEAs) has taken centre stage during the recent years in an effort to develop theoretical models that both explain reality, i.e., why IEAs are ratified by a fraction of the total number of countries, and identify ways in which the number of signatories could increase. Our work over the past twelve months has been extremely successful on both fronts. In other words, we were able to generalize and solve existing models as well as to identify instruments that enhance cooperation, transfers and issue linkage.
The scientific objectives of the project, can be grouped in two broad streams: (i) the purely theoretical and abstract one where solution concepts are being built and (ii) the also theoretical but applied in context one where the particular IEA models are being built. Both scientific objectives have been met successfully.
In particular, we formalized a new stability condition that captures a forward-looking decision-making process. Our results show that if identical countries behave farsightedly then the stable agreements are much larger than those the previous models supported. An original equilibrium notion was also constructed in a second paper in order to analyse the complex model at hand. Large part of the work of this second paper has been presented in a conference in July 2017 and is to be circulated as a working paper.
So far, in the literature all countries were assumed to be homogeneous. One of our models further extended this aspect to accommodate heterogeneous countries. Heterogeneity among countries captured not only different technologies but also different perceptions over environmental protection.Moreover, we extended the model by introducing mediation such as transfers. We demonstrated that intermediaries can use transfer to enhance cooperation and thus decrease emissions.
Issue linkage in the form of trade agreements and R&D cooperation either as a punishment or as a reward has already been brought up in the literature but only within the framework of bilateral negotiations. We explored further the effects of issue linkage within a multilateral negotiation setting. This was done by enriching the choice set of each economic agent.

Work performed from the beginning of the project to the end of the period covered by the report and main results achieved so far

At the first stage of our research where the theoretical foundations were built we built three distinct models and analyses.
In particular, we investigated how rational individuals partition themselves into different coalitions. We proposed a notion that determines simultaneously the coalition structures that are likely to prevail in a game, as well as the feasible payoff configurations associated with them. We proved existence for a general class of games, and investigated the efficiency of our solution.
Along the same lines of theoretical foundations we extended the basic model of IEA formation and examined the stability of self-enforcing International Environmental Agreements (IEAs) among heterogeneous countries in a two-stage emission game. We found that the introduction of heterogeneity did not yield larger stable coalitions, contrary to expectation in the literature. In particular, we showed that, in the case of two types, when stable coalitions exist their size is very small, and, if the asymmetry is strong enough, they include only one type of countries. Moreover, we demonstrated that heterogeneity can reduce the scope of cooperation relative to the homogeneous case by disturbing stability.
Lastly we examined the stability of IEAs among heterogeneous countries while allowing for transfers. Results showed that transfers can increase cooperation. Nonetheless, the increase in the coalition size comes only from countries belonging to the type with the lower environmental damages, which are drawn into the coalition by the transfers offered. Furthermore, the level of cooperation increases with the degree of heterogeneity.
At the second stage of our research we expanded the basic models of IEA formation by introducing other instruments and parameters that influence the formation.
We examined the stability of IEAs in an economy with trade. We extended the basic model of IEAs by letting countries choose emission taxes and import tariffs as their policy instruments in order to manage climate change and control trade. We defined the equilibrium of a three stage emission game. Numerical analysis illustrated that the interaction between trade and environment policies is essential in enhancing cooperation. Contrary to the basic IEA model, stable agreements are larger and more efficient in reducing aggregate emissions and improving welfare. Moreover, the analysis showed that the size of a stable agreement increased in the number of countries affected by the externalities.
The Environmental Kuznets Curve (EKC) hypothesis postulates an inverted U-shaped relationship between emissions and per capita income. The theoretical models developed to explain this stylized fact suggest that the EKC depends on various factors. This study investigated the income-pollution path in a multicountry framework that interacts. It is shown that an EKC can be obtained in this set up for a rich set of parameters, without any stringent conditions imposed on technology. Comparative static analysis is conducted to examine the role of such parameters. Moreover, the relationship between EKC and income distribution is explored. The connection between emission reduction and growth can improve IEA formation indirectly as it enhances the benefits a country accrues by cooperating.
The above results lead to the drafting of five working papers. Three of these papers have been circulated in the most prestigious open access working paper series in the area of environmental economics that circulates widely through SSNR and Repec.

Progress beyond the state of the art and expected potential impact (including the socio-economic impact and the wider societal implications of the project so far)

Our research proposed a number of solutions to the problems regarding international environmental negotiations as well as ways in which such negotiations could be more successful. Two newspaper articles and a final policy report laid out the project’s main policy results. The policy report was delivered to the Greek Ministry of the environment and energy that is involved in the negotiations. Awareness of the issues and challenges facilitates the implementation of (at times costly) policies by any government regardless of political affiliation. Along the same direction, the training of graduate students and most importantly the dissemination of the project’s results in the Greek media via several live interviews that appeared in the evening news had a significant impact on the public opinion regarding the importance of international environmental problems and the difficulties in achieving global solutions.

Professor Diamantoudi’s presence in the Department’s research life had a very important impact in solidifying and expanding the team’s research efforts. Furthermore, Professor Diamantoudi’s visit and contact with the graduate students created the opportunity for these students to farther their studies and expand their knowledge before they enter the European job market. Professor Diamantoudi had the opportunity to give lectures on Game Theory to the entire graduate student body, meet with students one on one on several occasion and formally become a member of a thesis committee.

Professor Diamantoudi gave a series of seminars to various Universities. The results were presented in 5 conferences and 3 events were organized.

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