Designing International Environmental Agreements

1. Designing International Environmental Agreements Charles D. Kolstad 3M Visiting Professor of Environmental Economics, MIT and Donald Bren Professor of Environmental Economics & Policy, University of California, Santa Barbara

2. Some Prominent Environmental Treaties • CITES—Convention on International Trade in Endangered Species (1973) • ICRW—International Convention for the Regulation of Whaling (1946) • Montreal Protocol on Substances that Deplete the Ozone Layer (1987)—a protocol of the Vienna Convention (1985) • Kyoto Protocol (1997) – a protocol of the UN Framework Convention on Climate Change (1992)

3. A Century of Environmental TreatiesNumber by decade of initiation

4. What’s the Issue? • Not a few but MANY environmental treaties • Some succeed; some do not • What makes a treaty work?

5. The Card Game Analogy • Each player is given two cards: one red and one black • Each player will anonymously hand in one card to Center (i.e., to Prof. Kolstad) • Payoff to each student after play of game: • 5 MIT Bucks for a red card in your hand • 1 MIT Buck for each red card Center holds • Maximum payoff: (N-1)+5 [where N = # students] • Trade in your MIT Bucks for Wonderful MIT Memorabilia: • Nice MIT Pen – 5 MIT Bucks • Nicer MIT Pen – 8 MIT Bucks • Really nice MIT Pen – 15 MIT Bucks • Your task: figure out what to hand in to the Center

6. Your strategy • Hand in your red card • It yields less to you than if you kept it • It yields far more to the group than if you kept it. • Society wants you to hand in your red card • Keep your red card • It is worth far more to you in your hand • Your payoff will be higher; society’s lower

7. Results • This experiment has been run many times • typically ⅓ -- ⅔ of people hand in their red card • When repeated with the same group, cooperation (handing in the red card) tends to decline • Analogous to transboundary environmental problems • Fundamental conflct between individual and group interests • Self-interest diverges from group interest • Powerful incentives to shirk your responsibility • Understanding how to solve card problem gives insight into solving transboundary environmental problems

8. Can an Agreement Solve Problem? • What would the agreement involve? • Agree to hand in red card • Needs to involve everyone? Or is subset ok? • What should be in the agreement? • Penalties for cheating (ie, not handing in red card) • Penalties for free-riding (ie, not joining but benefiting from agreement) • Any other characteristics of agreement? • Should be self-enforcing (ie, no appeal to higher authority) • Must create an aggregate gain to participants • Goes into effect when x% of people agree • Agreement must distribute aggregate gain • If people are different, must have side payments • Must be in the self interest of individuals to join

9. Back to the Real World • Card game has lessons for the real world • Goal: identify desirable characteristics of international environmental agreements

10. National vs. International Fundamental Differences in Environmental Regulation

11. Desirable Attributes of a Successful Multilateral Environmental Agreement • Create an aggregate net benefit to participants • overall gross benefits > overall gross costs • Distribute the aggregate gain among participants • For each participant, benefits > costs (individual rationality) • Self-interest important in convincing country to agree • Deter non-participation • Must make it undesirable to remain outside agreement • Trade sanctions most frequently used • Design net benefits in > net benefits out (participation constraint) • Deter non-compliance among participants • Penalties must be credible • Trade sanctions are easiest to use • Deter entry of new non-participants (avoid “leakage”) • Particularly appropriate for common property problems • Saving a fishery increases rents and may induce non-fishing countries to enter

12. Closer Look at Two Major Treaties • Ozone protection in stratosphere – Montreal Protocol • Climate change and greenhouse gas emissions – Kyoto Protocol

13. Montreal ProtocolDesigned for CFC’s leading to Ozone Depletion • Quantitative emission limits for industrial, transition and developing countries • Industrial countries pay for added costs to developing countries • Trade sanctions for non-participants and violators • Initial protocol modest; gradually tightened over 10-year period Ozone Levels Projected Source: World Met Org

14. UN Framework Convention on Climate Change – Kyoto Protocol • Emerged from Rio Conference in 1992 • US signed and ratified UNFCCC • Modeled after Montreal Protocol • Kyoto Protocol (1997) defines emission reductions for Annex I (developed) countries • Developing countries largely exempt • Penalities for noncompliance missing

15. Compare Montreal and Kyoto Adapted from Barrett (2003)

16. Payoffs to US with and without MontrealBillions of 1985 US$ Source: USEPA (1988), reproduced in Barrett (1999)

17. Emissions and Costs from Kyoto(Estimate – some controversy here) Units: For emissions, billions of tons of carbon; for costs, billions of 1990 US$, NPV Source: Nordhaus and Boyer (2000). Assumes full trading of emission obligations; anthropogenic emissions only.

18. Lessons • Montreal has lessons for Climate • Kyoto has ignored most of the important characteristics needed in international environmental agreement • Small net benefits for climate has implications • Strive to reduce economic inefficiencies • Start small • Uncertainties important • Cost uncertainty is a major reason for reluctance

19. Further Reading • Scott Barrett, Environment & Statecraft (Oxford University Press, New York, 2003) • Scott Barrett, “Montreal vs. Kyoto,” in Inge Kaul (Ed), Global Public Goods (Oxford University Press, New York, 1999) [see also other contributors to this volume] • Carlo Carraro (Ed), International Environmental Negotiations (Edward Elgar, Cheltenham, UK, 1997) • Charles Kolstad, Environmental Economics (Oxford University Press, New York, 2000)