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Bargaining and International Environmental Agreements

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Abstract

This article surveys game theoretic papers focused on the negotiation process that leads to an International Environmental Agreement. Most of the papers considered apply bargaining theory, although other approaches have been considered as well. Among other issues, the papers considered analyze: the burden sharing rule that will result from a negotiation over a global public good; the role of information asymmetries; the impact of unilateral commitments, delegation, and ratification; whether or not countries are going to form groups during the negotiation process; and the influence of the expectation of a future bargaining process on investment decisions. The basic bargaining model is optimistic, as it predicts that countries will reach an efficient agreement immediately. However, all the developments of this model surveyed afterwards are rather pessimistic and even the basic model has perverse incentives for pre-negotiation signals.

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Notes

  1. See Mitchell (2003) for a review of the different types of IEA that exist.

  2. The Kyoto Protocol “ operationalizes’ the Convention. It commits industrialized countries to stabilize greenhouse gas emissions whereas the Convention itself only encourages countries to do so. See http://unfccc.int/essential_background/kyoto_protocol/items/6034.php.

  3. A description of the different groupings of countries during the negotiations can be found at http://unfccc.int/parties_and_observers/parties/negotiating_groups/items/2714.php.

  4. Stahl (1972) proposed a similar alternating offers model, but with finite horizon.

  5. As already discussed, this transfer can be seen as a simple form of issue linkage, as side-payments are not necessarily monetary (I discuss below models where issue-linkage is modeled explicitly and players can choose to negotiate simultaneously or sequentially over different issues, and the order in the latter case).

  6. The RBS converges to the asymmetric NBS if the discount rates of the agents are not identical, while it converges to the NBS if both agents share the same discount rate (in other words, the discount rates are at the origin of the asymmetry). This provides a strategic justification of the NBS and also shows that this concept should be used when the time between offers is arbitrarily small, which may be interpreted as bargaining situations in which the absolute magnitudes of the frictions in the bargaining process are small (Muthoo 1999).

  7. The clean development mechanism allows a country with an emission–reduction commitment under the Kyoto protocol to implement emission–reduction projects in developing countries, and to obtain saleable certified emission reduction credits, which count towards meeting Kyoto targets.

  8. The NBS has been used frequently in the IEA literature to analyze the outcome of a bargaining process [see, for example, the two-stage IEA game based on simulations in Botteon and Carraro (1997)].

  9. See also the more policy-oriented analysis in Tirole (2012).

  10. Rational threats, first analyzed by Nash (1953), imply that prior to negotiation of the bargaining solution, parties can commit to actions to be played in the event that bargaining fails (i.e. in conflict), and by manipulating the conflict point affect the terms of the agreement in their favor.

  11. In Roelfsema’s (2007) model, when the median voter delegates to a person who cares more for the environment than himself, he is aware that the tax rate per unit of production will be sub-optimally high and profits too low for his taste. However, the commitment to a higher tax rate is observed by the foreign policy maker, who anticipates a higher output by his own firm. As he dislikes the pollution that comes along with higher production, this increases the equilibrium foreign tax rate. Nevertheless, in his analysis the “race to the top” induced by delegation only mitigates the race to the bottom induced by trade considerations.

  12. By definition, a set of strategies and a family of beliefs form a sequential equilibrium if the following three conditions hold: (i) the strategies of both players are optimal in all the points of the game, given the beliefs of the North, (ii) for any information set reached the beliefs of the North are given by Bayes’ law, and (iii) the beliefs must be the limit of, at least, a sequence of reasonable beliefs (i.e. for a sequence of possible deviations).

  13. Repeated games yield multiple subgame perfect equilibria. If renegotiation is not possible a common practice is picking a subgame-perfect equilibrium that is not strictly Pareto-dominated by any other. The problem is that many efficient subgame-perfect equilibria have inefficient continuation equilibria. Thus, when renegotiation is possible, these may not be credible. Farrell and Maskin (1989) therefore argue that for an equilibrium to be “credible,” all its continuation equilibria must also be “credible,” and that, when renegotiation is possible, that requires that all those equilibria be Pareto-undominated by other “credible” equilibria. With this concept history can affect the set of Pareto-unranked continuation equilibria, so that there can be threats, but history “cannot persuade players to do something that is jointly irrational for them in the face of a strictly Pareto-superior alternative” (Farrell and Maskin 1989).

  14. The EU actually announced its compromise as a unilateral action before the Cancun agreement, but it has nevertheless been included in it. The EU approved its strategy until 2020 by committing to a 30 % reduction in its 1990 emissions if other industrialized countries join the effort, or 20 % if they do not. Since this was done before negotiations for the post-Kyoto agreement got started, and the EU had good chances to meet its Kyoto targets, the commitment of the EU was a priori and credible. More recently, and in preparation for COP21 in Paris, the EU has confirmed a goal of reducing emissions by at least 40 % in 20130 compared to 1990, leaving the door open for a higher target “should the outcome of the negotiation warrant a more ambitious target” [COM(2015) 81 final/2].

  15. See Botteon and Carraro (1997) or Helm (2000) for alternative analyses of the impact of fairness considerations in burden-sharing.

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Acknowledgments

I gratefully acknowledge the financial support from the MEC (Spanish Ministry of Economy and Competitiveness), through the project ACBPA (ECO2012-35432). The ideas presented in this paper have greatly benefitted from discussions with several colleagues, in particular Tarik Tazdaït, Jean-Christophe Péreau and Michael Finus. The comments from three anonymous referees are also gratefully acknowledged.

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    Alejandro Caparrós

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Caparrós, A. Bargaining and International Environmental Agreements. Environ Resource Econ 65, 5–31 (2016). https://doi.org/10.1007/s10640-016-9999-0

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