Climate thresholds and heterogeneous regions: Implications for coalition formation

Abstract

The threat of climate catastrophes has been shown to radically change optimal climate policy and prospects for international climate agreements. We characterize the strategic behavior in emissions mitigation and agreement participation with a potential climate catastrophe happening at a temperature threshold. Players are heterogeneous in a conceptual and two numerical models. We confirm that thresholds can induce large, stable coalitions. The relationship between the location of the threshold and the potential for cooperation is non-linear, with the highest potential for cooperation at intermediate temperature thresholds located between 2.5 and 3 degrees of global warming. We find that some regions such as Europe, the USA and China are often pivotal to keeping the threshold because the rest of the world abandons ambitious mitigation and the threshold is crossed without their participation. As a result, their incentives to cooperate can be amplified at the threshold. This behavior critically depends on the characteristics of the threshold as well as the numerical model structure. Conversely, non-pivotal regions are more likely to free-ride as the threshold inverts the strategic response of the remaining coalition. Moreover, we find that our results depend on which equilibrium concepts is applied to analyze coalition formation as well as the introduction of uncertainty about the threshold.

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Notes

  1. 1.

    Note that in his analysis of cooperation and catastrophic damages, Barrett (2013) makes a different assumption about the behavior of the remaining coalition: the coalition acts as a Stackelberg leader in emission choices, anticipating the emission choice of the defecting player. In his model, a leaving player will actually reduce his emissions, by force of the coalition.

  2. 2.

    We thank an anonymous reviewer for pointing us to the similarities in strategic behavior at the threshold of symmetric players facing uncertainty and heterogeneous players as in this study.

  3. 3.

    WITCH implements the coalitional optimum through maximization of the utilitarian sum of individual utility per region. MICA computes the coalitional optimum by solving a competitive equilibrium on international commodity markets with full internalization of the climate change externality.

  4. 4.

    This assumes that the defector falls back to its baseline emissions. In principle, there are many equilibria in emission strategies here, but characterizing them analytically is beyond the scope of this paper.

  5. 5.

    Equivalent to the threshold in terms of cumulative emissions ET of the previous section, given that temperature increase and cumulative emissions have an almost linear relationship (Matthews et al. 2009).

  6. 6.

    For rigorous tests of farsighted or γ-core stability a full set of all possible coalitions is needed but is not available as the additional computational effort puts this beyond the scope of this study. A discussion of testing core stability in non-transferable utility models is found in Kornek et al. (2014).

  7. 7.

    This uncertainty about threshold damages is conceptually equivalent to the following uncertainty about the threshold location. A threshold with damage d = 0.04 materializes at the temperature TS = 2.5 (and TS = 3.0 respectively) or at an infinitely large temperature, with 50% probability each. See Barrett (2013) for a discussion about the different implications of damage vs. threshold uncertainty.

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Acknowledgments

We thank participants at the FEEM Workshop on Public Goods 2014, the 20th Coalition Theory Network Workshop in Venice, the 7th Atlantic Workshop on Energy and Environmental Economics in Atoxa, two anonymous referees, Alessandro Tavoni, Henry Tulkens, and Philippe Colo for very helpful comments. VB would like to acknowledge financial support from the ERC grant agreement n 336703 (RISICO). KL gratefully acknowledges financial support by the Federal Ministry of Education and Research (BMBF) program “Global Change 5 + 1” as part of the grant agreement 01LN1703A (FINFAIL). An earlier version of this paper has been circulating under the title “The catastrophe smile - The effect of climate thresholds on coalition formation”.

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Emmerling, J., Kornek, U., Bosetti, V. et al. Climate thresholds and heterogeneous regions: Implications for coalition formation. Rev Int Organ 16, 293–316 (2021). https://doi.org/10.1007/s11558-019-09370-0

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Keywords

  • Tipping points
  • International environmental agreements
  • Climate change

JEL Classification

  • C72
  • D62
  • H41
  • Q54