Luring others into climate action: Coalition formation games with threshold and spillover effects

Overview

Cooperation between countries is required to overcome major societal problems, such as climate change. However, rational logic dictates that individual countries are incentivised not to act, instead preferring to ‘free ride’ on the efforts of others.

It is possible to imagine a scenario in which all countries wait for each other to show leadership, resulting in an irreversible catastrophe. Successful climate change mitigation therefore hinges on some actors leading by example. Those countries will have to push temporarily individual incentives aside in favour of the long-term greater good.

This paper uses game theory to find out how countries can work together to mitigate against climate change. The ‘threshold public bad game’ described in this paper was designed to capture the trade-offs faced by countries choosing whether to transition to clean technology, and to what extent.

The game accounts for the fact that the degree to which a country commits to clean technology will dictate whether countries collectively manage to avert dangerous climate change or not. The game also features innovation ‘spillovers’.

Key findings

• The game described in this paper finds that climate negotiations can result in two outcome scenarios:

Scenario 1: An agreement is made that includes early investments in clean technology. The expected returns from clean technology investment are sufficiently large that a pivotal number of countries are lured into action. A fringe of countries does not join the agreement but do react proactively by shouldering the reduced burden that they are left with.

Scenario 2: An agreement is made that expects modest benefits from clean technology innovation. The group of countries signed up to the agreement is not large enough to be pivotal. In this situation it is desirable that the benefits from clean technology innovation are shared with fringe countries, and that this is used to leverage their effort.

• The more countries involved in an agreement that invests in clean technology innovation, the less costly that investment will be for each country.
• Countries involved in an agreement have to address most of the burden of climate change in instances when they do not share the benefits of clean energy innovation with fringe countries outside the agreement.
• If a climate change agreement does involve sharing clean energy innovations with those outside the agreement, 40% fewer countries are expected to sign up to such an agreement. However, fringe countries would later be lured to embrace clean technology as a result of innovation spillovers.
• It is important that clean energy research and development (R&D) is included in international climate negotiations. All countries are better off when countries not signed up to agreements can also profit from clean technology investments with modest returns.
• Since rational incentives pull countries towards widespread defection (and therefore increasing the risk of a climate change catastrophe), it is all the more important to induce participation by more reluctant countries. The diffusion of clean technology innovation may be an important lever for climate action.