The nature of the negotiation game can drastically influence the outcome. The two games below let you compare the Quantity game that has been failing with the newly-proposed Price-Commitment game. In both games there are 10 identical countries, and 9 have chosen their strategy, that is, their ambition level (blue). You can try different strategies for your country to see which gives you the most “Net Benefit.” That’s climate benefit minus abatement costs, plus (or minus) any profits from selling (buying) permits to (from) other countries in the Cap-and-Trade game.
Notice that you win the Cap-and-Trade game by pledging no abatement, which nets you an extra $1,083B/year compared to winning the price game by cooperating. You might get away with a zero-abatement bid by saying, “Our economy must grow, and just keeping the same level of emissions is hard enough.” In any case, pledging minimal abatement is clearly in your self interest. But in the Price game, it’s the opposite. Your self interest (maximum net benefit) is best served by a 100% ambitious pledge.
Result #1: If the rest of the world is ambitious, Quantity (cap-trade) negotiations tend to make you anti-ambitious. This benefits you, at the expense of all others. But Price negotiations align your self interest with the common good.
Understanding Price Negotiations
This is the simplest of several price-commitment games. In UN negotiations, unanimous agreement is required. The same is true in this price game.(4)although in the real word, it’s better to exclude anti-climate countries So the only price that can be agreed on is the lowest price that any country pledges. This seems backwards, but as we just saw, for a single price, it causes strong pledges to be in your own self interest. This is because (as you might have noticed) raising your pledge raises the global price if your pledge is the lowest.
Raising the global price is good for you because, while it raises your abatement costs, you get so much climate benefit from everyone else’s abatement, that you come out ahead.
If your pledge is not lowest, it will have no effect. So a higher pledge (up to your true preference for the global price) will either benefit you or have no effect. So it is in your self interest to pledge the global price that you think is optimal.
You actually don’t need any ambition at all. Everyone can just pledge in their own self interest and the global carbon price will rise to the optimal level.
Result #2: When negotiating a Global Price Commitment, pledging a higher price either has no effect, or it raises the global price—which is in your self interest.
Understanding Zero Ambition (click the ‘More’ button)
If you set the Ambition of “other” countries to zero in both games, you will see that this results in an Abatement of 3.3 gigatons and a global price of $67. Because global warming is severe in this model, causing $50 trillion of damage annually if nothing is done, countries will abate some, just in their own self interest, even without any climate negotiations. This is because low-level abatement is cheap, has a relatively large global impact, and 1/10 of that accrues to your country.
Definition: Zero ambition is what countries would do without any climate negotiations, acting only in their narrow self interest and free-riding on others.
Definition: cost and benefit in the games are all measured relative to zero ambition. They are the consequences of negotiation and ambition, not just self interest.
Understanding Cap and Trade (part 1: free riding)
With “other-country” Ambition set to zero in the cap game, try various Abatement Pledges. You should find that the Net-Benefit-maximizing pledge is exactly the same as the zero-ambition pledge for other countries. But remember these are two completely different concepts!
Zero ambition = what all countries would do without cap-and-trade or negotiations.
Your Max-Net-Benefit strategy is found in a world with cap-and-trade and negotiations.
This tells us that if other countries exhibit zero ambition, cap-and-trade negotiations don’t change your incentives at all — your self-interest pushes you toward zero ambition.
Result #3: If other countries have zero ambition, Quantity negotiations give you the same free-rider incentives as no negotiations.
But as you saw in the Quick-start game, …
Result #4: If other countries are ambitions, Quantity negotiations give you worse free-rider incentives than no negotiations, and your self interest dictates zero abatement, which is much less than zero-ambition abatement.
Remember, with zero ambition, the climate problem still causes everyone to abate more than zero, just in their own self interest. In the next lesson you will click the ‘More’ button to see how trading exacerbates the free rider problem when some countries show ambition. … to be continued.
Global climate benefit = 10 x (Your Climate Benefit), because each country gets the same global climate benefit.
References [ + ]
|1.||↥||$ value to your country of improved climate|
|2.||↥||of low-carbon fuels, efficiency measures, etc.|
|3.||↥||from selling excess permits to other countries|
|4.||↥||although in the real word, it’s better to exclude anti-climate countries|