Reducing the risks of climate change is the most important example of the provision of a global public good. It is also in many ways the ‘purest’ example of a public good in that emissions of greenhouse gases (GHGs) from any one country have the same effect on the atmosphere as those from any other. Climate change also shares some key characteristics with other environmental challenges that require the international management of common resources, including the depletion of fisheries, the protection of the ozone layer, and with the provision of global public goods in other areas including health and development co-operation. While the impact of climate change is much larger in scale than any of these, there is much to be learnt from the experience of tackling these other problems.
Economists seek to understand the incentives relevant to situations that require collective action, and have studied the institutional arrangements that can facilitate co-operation. The study of collective action is concerned with understanding how to overcome the market failures that lead to the under-provision of public goods where individuals or countries face an incentive to free-ride on the actions of others.
In The Logic of Collective Action, Olson (1965) argues that rational, self-interested individuals would not act to secure a common interest unless they were coerced, or induced to do so with incentives that were not available to those who did not participate. Collective action by independent sovereign nations is particularly challenging. In the area of climate change, there is no supranational authority to provide coercive sanctions, so co-operation requires that nations perceive sufficient benefits that they are willing to participate in international treaties or other arrangements, and share a common vision of responsible behaviour. They must also recognise that without their involvement, international collective action may fail.
Game theory is a tool that economists have used to study the challenges of collective action, especially the problems of provision of local and global public goods. Game theory has been used to explore the underlying structure of some common problems.
The Prisoner’s Dilemma Game has been used to explore a wide range of situations in which individuals act rationally in the light of their own situation and yet find themselves faced with an outcome that leaves them worse off than if they were able to co-operate.
The theory of collective action now recognises that many types of games are relevant, and in particular that strategic behaviour and repeated games provide a number of important insights for understanding how to promote international co-operation.
- Changing the structure of the incentives in the game can make co-operation more attractive. This can happen through increasing the shared understanding and awareness of the benefits of co-operation and making links to a wider range of benefits as well as through creating side payments (or, where costs of action are involved, sharing costs differently) to secure co-operation.
- Reciprocity plays a key role in situations where the players facing the prisoners’ dilemma have the opportunity to play repeated games and remember the previous choices of the other player. In particular, many players adopt a strategy of conditional co-operation, in which they contribute more to the provision of a public good the more others contribute.
- In repeated games, increasing the frequency of contact and transparency contributes to building co-operation, just as institutional structures and repeated negotiations do in international agreements.
- In repeated games, options for renegotiation of the rules at key stages play an important role. Compliance mechanisms that rely on harsh punishments are hard to enforce, as they often have a detrimental effect on the punisher as well as the punished and create incentives for both the punisher and the defector to seek renegotiation in the event of a breach of co-operation.
- Reputation can play a significant role in influencing outcomes. A leader can create a positive dynamic by demonstrating a willingness to co-operate, and the actions of the leader have a strong influence on the beliefs that others in the game hold about the prospects for co-operation. It does not make a difference whether others in the game interpret these actions as ‘rational’ or ‘irrational’ – the point is they simply establish reputation.
Though extremely useful as a starting point for analysing international collective action, most of these theories tend to focus only on self-interest very narrowly defined, and so leave out perspectives on responsibility and ethical standards – for example, the views on what constitutes human decency that are expressed by the public. This does not mean the theories should be ignored – on the contrary, their conclusions are always imperative to implement correctly. However, a broader vision can acknowledge the important senses of community and shared endeavour that are evident in the history of many international frameworks for co-operation.
Game theory has been used to try to identify key criteria for the design of frameworks for international collective action on climate change.
Arrangements for global collective action exist across a wide range of issues including international trade, health, development aid, terrorism and environmental protection. Sandler (2004) identified a number of conditions that would make it more or less likely that collective action would succeed in different circumstances. He found that international collective action was more likely to succeed where there was sufficient mutual self-interest (for example, international standards for telecommunications or aviation); in response to recognition of a shared threat (for example, increased co-operation on counter-terrorism in the immediate aftermath of 9/11), and where there was leadership by a dominant nation (for example, the role of the USA in securing agreement to protect the ozone layer). The barriers to action on climate change therefore included perceptions that country-specific costs of action dwarfed the benefits of action, and that was exacerbated by considerable uncertainty over the latter.
Barrett (2005) applied the lessons of collective action and game theory to an extensive review of over 190 arrangements for environmental co-operation – from the North Pacific Fur Seal Treaty to the Montreal Protocol on Ozone Depleting Substances. From this he(Barrett) concluded that the most successful treaties create a gain for all their parties, and sustain co-operation by changing the rules of the game – by restructuring the incentives for countries to participate and for parties to comply. Barrett suggested this requires a combination of carrots and sticks. Compensating payments may promote wide participation(for example because they distribute the gains from co-operation equally), while penalties that are not too high to lack credibility, may deter non-participation and non-compliance.
The scale of action required to reduce the risk of dangerous climate change requires both broad participation and high levels of ambition by all countries. The existing international arrangements, national goals and business-led initiatives provide a strong foundation for action. Much has been learned in the last fifteen years, and there is growing international momentum to support moves to co-operation on a much greater scale. The United Nations Framework Convention On Climate Change(UNFCCC) Dialogue on Long-term Action, the Kyoto Protocol discussions on the second commitment period, and a range of partnerships and initiatives provide room to explore a range of approaches.
There is a strong case research for stabilisation the Carbon dioxide(CO2) between 450-550ppm. This would require very strong action to limit and reduce global emissions, starting now and continuing over the next 50-100 years. Robust, durable frameworks for international co-operation, based on a shared understanding of long-term goals, are required to meet this challenge. It is essential that all major developed countries participate in this action. However, this will not be enough. If developed countries reduce their emissions by 60% on their 1990 levels by 2050, depending on the overall stabilisation goal, the remaining emissions from developing countries could not exceed an increase of 25% on 1990 levels by 2050.
The distinction between developed countries taking responsibility for emissions reductions and making physical reductions within their borders is an important one. This is because the former can drive investment flows globally that can make it possible for developing countries to limit their emissions far below the levels they would otherwise be expected to reach.
For example, were developed countries to take responsibility for reducing their emissions in 2050 by 90% on their 1990 levels, but put in place frameworks that allowed at least 50% of the investment in meeting these goals to take place outside their physical borders, they could meet the rest through investment in reducing carbon emissions in developing countries. This would mean, depending on the overall stabilisation goal, developing countries would still have to reduce the emissions within their physical borders in 2050 by around 50% on 1990 levels, but we calculate that they could also have flows of up to US$40 billion per year that could be directed towards helping achieve this. Therefore, the more that developed countries commit to taking responsibility for, the more incentives could be provided for developing countries that take on commitments to limit or reduce emissions themselves.
It remains important that developing countries do take on commitments – in suitable forms and with the appropriate support. If the investment flows that are created by the rich countries take place only through the use of project mechanisms that allow them to offset their own commitments through action elsewhere, without any responsibility on the part of the recipient countries to take appropriate steps to constrain other sources of emissions themselves, there is a substantial risk of moral hazard.
The key challenge is to devise an agreement or a set of arrangements that attracts wide participation including all countries with significant sources of emissions, and achieves deep and lasting reductions in emissions from all sectors. Countries are motivated to participate in international co-operation on climate change for a number of reasons, including the extent to which co-operation supports a range of short-term goals as well as the long-term goal of reducing the risks of climate change.
Designing arrangements that are compatible with the underlying incentives of the participants is an effective way to ensure their continued adherence to the rules of the game and therefore a credible, lasting framework. Shared notions of responsible and collaborative behaviour, within and outside governments, create the conditions in which countries honour international commitments.
The game theory that underpins analyses of international co-operation for global public goods tends to take as its starting point a narrow perspective of self-interest as the only motivation for action, distinguishing it from ethical approaches. In fact, these can be combined.
Although the key conclusions arising from these analyses are vital to examine, the creation of norms, and links to notions of responsible behaviour, are central to actions taken by governments. Indeed, as we have noted, some game theory is moving beyond the traditional focus to examine the importance of reciprocity and reputation in solving collective action problems.
On many dimensions of international relations, governments make and respect international obligations because they are in line with perceptions of responsible and collaborative behaviour, and because domestic public opinion supports both the objectives and the mechanisms for achieving them. Custom plays a very important role in international relations, and is often embodied in understandings and agreements that are not formally binding. These are often referred to as soft law. Environmental collective action provides numerous examples of the soft law approach and creation and recording of acceptable norms of behaviour between countries.
The principles set out in the non-binding 1972 Stockholm Declaration on the Human Environment were developed in numerous subsequent formal and informal agreements. They were picked up at the Earth Summit held in Rio de Janeiro in 1992. At Rio, world leaders signed conventions on climate change, biodiversity and desertification. They also adopted Agenda 21, a wide-ranging blueprint for action to achieve sustainable development worldwide. The Earth Summit concept of think globally, act locally inspired action from governments, community groups and individuals around the world. The Earth Summit was followed up at the World Summit on Sustainable Development in Johannesburg in 2002, where governments agreed a non-binding Plan of Implementation. This was supported by the launch of a large number of multi-stakeholder partnerships to take forward specific action. The United Nations Commission for Sustainable Development is currently reviewing the Johannesburg commitments on sustainable energy.
Soft law may allow countries to take on obligations that otherwise they would not. This is because non-binding instruments usually have an element of good faith that they will be adhered to by countries if possible, and may embody a desire to influence the development of state practices towards actual law making. They can also be vehicles for focusing consensus on rules and principles and for mobilising a consistent, general response on the part of states. An example of this is ‘tote-board diplomacy’, whereby a collective standard for action is held up publicly, and countries that fail to agree are subject to collective pressure.
A collective sense of responsible behaviour and public acceptance of policy measures requires a shared understanding of action around the world. Governments also tend to look to the actions of neighbouring countries and key trade partners to benchmark the level of effort they are willing to make.
Co-operation across a broad range of issues including security and development can be sustained by norms of internationally responsible behaviour. Powerful statements stressing the importance of such behaviour in these contexts have been made by individual leaders, or expressed in a variety of non-binding international legal texts such as the declarations of the United Nations and communiqués from bodies such as the G8.
Collective action can be strengthened through actions taken at smaller, regional and national levels, for example, because “innovative rule evaders can learn how to get around a single type of rule more effectively than a multiplicity of rules-in-use.” Therefore, codifying and passing commitments into domestic law can reinforce current and future commitments for action on a global public good. This sends a strong signal that a country is sincere in pledging action – and it means that reversing course becomes considerably more difficult and politically and legally challenging. Trust and credibility will be built especially when a country is seen to be taking real action to meet those commitments.
Formal compliance mechanisms have a role to play in managing specific and limited infractions of rules within international regimes. Agreed processes of adjustment may promote continued participation in a regime. Where governments have set up a regime to take international action, compliance mechanisms can be used to maintain the credibility of that regime. The credibility of the regime will be damaged if rules of the regime are seen to be flouted, and this will quickly lead to a loss of support from other participants.
The existence of a compliance procedure may be sufficient to deter free-riding within the regime, provided that there is transparency, monitoring of actions, and, most importantly, there is pressure for the country concerned to remain part of the regime. However, participants can quit regimes. This means that for global public goods, formal compliance mechanisms are likely to only be effective for specific and limited infractions. National commitments, or sanctions applied in domestic law if those commitments are not met, may not be credible because governments can renege on their predecessors’ commitments. This can also present a problem for international compliance.
The corresponding notion on the international level is that an international regime requires clear goals, and may require some form of adjustment of specific levels of effort to reach those goals over time to allow flexibility to respond to unforeseen circumstances. Adjustment could take account of economic growth, the underlying carbon price in economies, the cost of low carbon technologies, or emissions reductions achieved. This, rather than automatic sanctions or punishment, may therefore create a way to respond to changing circumstances within one or a few countries without jeopardising the future of the entire framework.
It would be important that these rules were set, monitored and revised by a competent and credible international process, ideally a body independent of government ministries and influence in order to build credibility through reputation. In the absence of such a body, representation of finance, external affairs and economic ministries in addition to environmental ministries would be important to obtain real buy-in to agreed rules.
Increasing the transparency and comparability of parallel national action is a significant challenge and will require a strong response from existing international institutions to enhance the coherence and cohesion of different policies. Increasing understanding of action across different dimensions at different levels will build confidence amongst countries regarding the efforts of others and this could strengthen overall effort.
Increasing information and monitoring may help to reduce free riding and improve accountability for the provision of public goods. In the case of climate change, it is already clear that there are a number of dimensions of and a range of overlapping approaches to co-operation. Transparency and a shared understanding of action is required across all these dimensions, including on emissions reductions, the scope and level of carbon prices and policies, investment in innovation, parallel and coordinated approaches to standards and regulation, commitments to international co-operation on the deployment and diffusion of relevant technology, as well as international support for adaptation. The ways in which co-operation are assessed therefore have to be similarly broad, in the same way that the metrics used for organisational performance management have widened in recent years through use of approaches such as the balanced scorecard.
The task of benchmarking responsible action against other countries is made more complicated in the case of climate change by the competing priorities that can drive similar action. For example, the promotion of biofuels in Brazil, China and the United States of America(USA) is often described as an energy security measure; in the European Union (EU), it is seen primarily as a response to climate change. Even more complex are the drivers for energy efficiency measures across countries. Therefore the definition of overall commitments for domestic climate change and energy policy also plays an important part in comparing efforts across countries.
The United Nations Convention on Climate Change (UNFCCC) and Kyoto Protocol have already created a strong system for estimating and reviewing emissions according to standard guidelines. Developed countries report emissions annually under this system. Formal national communications required from all countries also set out at a high level the policies and measures that are being implemented, but they are less frequent (every five years or so) and although there are agreed reporting guidelines, cross-country comparison is difficult.
Other initiatives can provide supplementary information. The G8 countries have agreed to provide annual updates in implementing the Gleneagles Plan of Action on Climate Change, Clean Energy and Sustainable Development, which covers areas including energy efficiency, cleaner power and the use of market-based instruments. The World Resources Institute has begun to develop an informal database of policy measures implemented in developing countries35
Transparency plays a key role in other areas of economic co-operation. The International Monetary Funds( IMF), Organization For Economic Co-operation And Development (OECD), International Energy Agency(IEA), and many United Nations(UN) organisations systematically collect and compare data across countries on a wide range of economic policy issues. It may be that a more systematic approach to monitoring economic policy relevant to climate change, including the explicit and implicit prices of carbon across the economy, would require the skills and expertise found in these institutions.
Global public concern and awareness about climate change are growing rapidly. They both influence and sustain international co-operation, national aspirations and private sector leadership on climate change.
As since the individual preferences are subject to change, and public opinion across the world plays a very important role in sustaining co-operation on climate change. As on many other issues, public scrutiny of government policy matters. Public understanding of the challenge of climate change is essential to create the political space for governments to introduce and sustain the policies that are required to make the transition to a low carbon economy. International stakeholder pressure is also relevant, as a result of global investment flows and the responsibilities of multinational companies for their worldwide operations.
The public is influenced by the statements of, amongst others, politicians, scientists, Non-Governmental Organisations (NGOs), religious leaders and businesses, and by the presentation of the issues in the media. There has been a clear recent increase in public concern over climate change. Analysis of the incidence of references to climate change and global warming show that between 2003 and 2006, references in major newspapers doubled.
International development NGOs and faith groups have increasingly become concerned about climate change. The United Kingdom’s Stop Climate Chaos includes environmental and development NGOs as well as faith groups and trade unions. In the USA, a wide range of groups is campaigning on climate change issues. For example, the Evangelical Climate Initiative (ECI) released a statement signed by more than 85 evangelical leaders calling for action on climate change.
Pew Center polls on changing public attitudes around the world have sought to examine public attitudes to news stories. In a recent poll, awareness of climate change was high in the developed world, but in the developing countries sampled, awareness was generally lower than for a range of other issues. Clear majorities in most countries surveyed were concerned about the problem. As the science of climate change is widely accepted, public attitudes will make it increasingly
difficult for political leaders around the world to downplay the importance of serious action to respond to the challenge.
We noted that extensive action has already begun on different levels – from the multilateral to the individual level, but that the scale of action now required demands a response on a much larger scale, involving all developed and developing countries in a collective endeavour to limit and reduce emissions.
Economic analysis can provide some guidance on the directions for effective, efficient and equitable frameworks for co-operation, and the following chapters will consider in more detail how to build key elements of international co-operation on climate change. These include carbon markets, support to developing countries in the transition to a low-carbon economy, international co-operation to accelerate innovation and to support the diffusion of energy efficient and low-carbon technologies, action to reverse emissions from land use change and forestry, and support for adaptation.
Each of these dimensions of action has its own specific challenges. An effective response to climate change requires co-operation in each area, supported by a shared understanding of long-term goals, and transparency about the contribution that each country is making towards them.
Climate change is one of the greatest challenges to international co-operation the world is currently facing. As since the scale of the problem and consequences of failure to tackle it are immense. A wide range of policy tools for mitigation and adaptation are available to national governments for the climate change. However, no two countries will face exactly the same situation in terms of impacts of climate change or the costs and benefits of action, and no country can take effective action to control the risks that they face alone. International collective action to tackle the problem is required because climate change is a global public good – countries can free-ride on each others’ efforts – and because co-operative action will greatly reduce the costs of both mitigation and adaptation. The international collective response to the climate change problem required is therefore unique, both in terms of its complexity and depth.
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