Game Theory in Global Warming
Source: http://opim.wharton.upenn.edu/~clemons/blogs/prisonersblog.pdf
This article describes the economic forces that hinder moving toward a greener planet. As a planet, most people and countries seem to have acknowledged that there is a problem with global warming. Countries are working towards fixing this issue, but the talks are very tedious and it is difficult to make progress. This may seem surprising considering that some of the effects of pollution and global warming can already be seen and they will only get worse. Countries agree that the best outcome would be to invest in cleaner technology to control emissions. However, if a single country were to defect from the effort to reduce emissions, it would not significantly increase the total emissions. That country could save the money of switching to cleaner standards while reaping all of the benefits of fewer global emissions. More important than direct savings, it is cheaper to produce goods without regard to the side effects on the planet. Factories in that country would not have to worry about installing filters or investing in new methods of production. Therefore, the goods being produced by that country would be cheaper and thus be more competitive in a global market. This country that does not decrease emissions gains a significant advantage in the market place while still benefitting from a cleaner planet. Similarly, if only one country tries to decrease emissions while the rest of the world does not, that country will hurt itself by making their goods less competitive while only making a small impact on global emissions. Of course, all countries analyzing this situation come to the same conclusion. Therefore, all countries find themselves in a position where their dominant strategy is to have cheaper, lower standards for emissions, despite the fact that the world would be better off if all of the countries chose to have greener production. This is a manifestation of the free rider problem.
The prisoner’s dilemma provides very powerful motivation for the players to play their dominant strategies in which all players end up worse off. There are some ways to combat this so that players can end up with the better outcome. One of the easiest is to notice that, unlike in the prisoner’s dilemma, the countries can communicate with each other. This helps, but it still leaves the issue of trustworthiness. For example, in the original game, if both prisoners could communicate with each other, they could both decide to not confess and only take a small amount of jail time. However, there is nothing to stop one of the prisoners from deciding to confess anyway, getting no jail time for himself. Even with communication, a more powerful motivator must be used unless the players truly trust each other. One of the best ways to encourage cooperation is to add an element to the game which changes the payoffs. For example, consider the original prisoners dilemma. If both prisoners know that they have some criminal code in which if a prisoner confesses, his partner’s friends will hurt his family, suddenly it is better for him to not confess. This new payoff matrix will shift the equilibrium to be in the upper left, where both prisoners do not confess and do a small amount of jail time.
This is the basis of one of the main strategies to solve this problem. One way to implement such a solution is for nations to agree on an impartial agency to track emissions. All nations can then sign a pact that would impose high tariffs on those nations that do not comply to reduce their emissions. This would align the interests of the nations. Now, instead of having an advantage of more competitive goods, the goods of nations that do not comply would instead be more expensive and thus less competitive in other countries. Additionally, this change in payoffs can be assisted by individuals in each of the countries. If a large portion of consumers can agree that it is necessary to reduce emissions, then they will accept more expensive goods and tariffs on other countries while the world transitions to greener emissions. Both of these actions will change the payoff matrix so that reducing emissions is a dominant strategy. The challenge is implementing this effectively and motivating a large enough portion of the population. It is also imperative that all major polluting countries agree. If not enough countries agree to impose tariffs on those that don’t comply, the tariffs will not be an effective enough barrier to offset the cheaper manufacturing costs. This is one of the many issues that illustrate the power of motivations that exist in prisoner’s dilemmas and the difficulties involved in solving them.
-TW