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Linear Compensation and UN Climate Talks

http://www.pnas.org/content/early/2011/09/07/1112844108.full.pdf+html

Thomas Dietz and Jinhua Zhao of Michigan State University have written a paper in which they discuss the application of game theory to UN climate talks. Since the 5 nations with the largets CO2 output contributes only 60% of worldwide CO2 output, it is essential for any international agreement to involve the cooperation of many nations for the effect of CO2 emissions to be substantial. However, a given nation achieves maximal utility in the case where every other nation agrees to lower CO2 emissions but the nation itself does not agree, because in this situation, the nation reaps the rewards reduced climate risk but does not have to pay the economic sacrifice of lowering emissions. Even if no other nations agree to reduce emissions, a given nation still has an incentive not to reduce emissions because of the deleterious effect on its economy. However, in this scenario, all nations will achieve lower utility than if they cooperated to reduce climate risks. The situation is further complicated by the uncertainty inherent in climate projections. It is not clear how much damage climate change will cause, nor is it clear which countries will suffer the bulk of this damage.

Dietz and Zhao discuss the proposal of an earlier paper, “Self-enforcing strategies to deter free-riding in the climate change mitigation game and other repeated good games” by Heitzig et al. This proposal involves the use of linear compensation, in which a nation is punished for failure to meet emission reduction goals in a given year by increasing the goal for the subsequent year. The increase in goal also depends on whether other nations met their emission reduction goals; if more nations fail to meet their goal, the punishment for each will be less severe. The advantage of this punishment technique is that it accounts for the uncertainty in how difficult it will be for a nation to reduce its emissions by a given amount. If this turns out to be easy, most nations will meet their goals and nations that do not will face relatively severe penalties. However, if it turns out to be difficult, most nations will face lenient penalties for their failure to meet their goal. Additionally, this technique takes advantage of peer pressure; if most nations are easily meeting their emission reduction goals, under-performing nations will feel additional pressure to reduce emissions and not lose face.

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