Nash Bargaining Solution and International Climate Agreement
https://link.springer.com/article/10.1007/s10784-017-9351-3
https://link.springer.com/article/10.1007/s10584-017-1975-3
The Paris Agreement on climate change is yet to close the gap between pledged and requisite carbon emissions reductions and other climate control measures to keep the planet from warming beyond the commonly accepted 2 °C target. In that context, these papers examine the formation and performance of international climate agreements (ICAs) in a “cartel” game setting where the distribution of the cooperative gains is based on the Nash Bargaining Solution. The authors identify some key factors fueling the bargaining power of different countries and organizations in international climate negotiations for distributing collateral gains. These factors provide insights into the potential bargaining positions of countries based on their varied characteristics. They consider outside options in the Nash Bargaining Solution and expound on their role in improving the positive effect of the Solution on the formation and efficiency of ICAs.
As we have studied in class this semester, bargaining is a tool to share collaborative gains and to facilitate reaching an agreement. We considered how a node’s position in a network affects its power in the market. In some cases, we were able to come up with precise predictions about gains and power, but in others, the analysis left open a range of possibilities. These principles that we learned in class are applied by the authors in the context of forming ICAs in diplomatic environments. To improve incentives to join an ICA, the Nash Bargaining Solution can be used to distribute cooperative gains across signatories. In particular, the authors use the Nash Bargaining Solution to obtain results from the stability of coalition model (STACO).
Their findings indicate that the Nash Bargaining Solution can improve the participation incentives and performances of ICAs as compared to agreements that do not redistribute gains from cooperation. This is essentially the principle of distributing the surplus equally as we have seen in class. But, the papers find that the Nash Bargaining Solution is limited in its capacity to overcome free-riding incentives. However, if Nash bargaining accounts for outside options of players – a crucial factor in determining how much each player gets (as seen in class) – the papers find that larger stable coalitions and higher global abatement levels are achievable. In fact, Nash bargaining with outside options can stabilize the largest coalitions that can possibly be stable in this game.