Agreeing on Efficient Emissions Reduction

• Author: Béatrice Roussillon,Paul Schweinzer,Olivier Bos
• Published date: 01 October 2016
• DOI: http://doi.org/10.1111/sjoe.12164
• Date: 01 October 2016

Scand. J. of Economics 118(4), 785–815, 2016

DOI: 10.1111/sjoe.12164

Agreeing on Efficient Emissions Reduction∗

Olivier Bos

LEMMA, Panth´

eon-Assas University, FR-75006 Paris, France

olivier.bos@u-paris2.fr

B´

eatrice Roussillon†

GAEL, Grenoble Alpes University, FR-38000 Grenoble, France

beatrice.roussillon@upmf-grenoble.fr

Paul Schweinzer

Alpen-Adria-Universit¨

at Klagenfurt, AT-9020 Klagenfurt, Austria

paul.schweinzer@aau.at

Abstract

We propose a simple contest-based mechanism providing incentives to reduce harmful emis-

sions to their efficient level without infringing upon productive efficiency. Participation in

the most stylized form of the scheme is voluntary and individually rational; all rules are

mutually agreeable and are unanimously adopted if proposed. The scheme balances its bud-

get and requires no principal. In a perhaps more realistic stochastic output version, which

could potentially inform policy decisions, we show that the transfers required by the efficient

mechanism create a mutual insurance motive that can serve as an effective rationale for the

(gradual) formation of international environmental agreements.

Keywords: Agreements; climate policy; contests

JEL classification:C7; D7; H4; Q5

I. Introduction

The disappointing series of failures to reach agreement among the 196

members of the United Nations Framework Convention on Climate Change

in Copenhagen, Canc´

un, Durban, Doha, Warsaw, and Lima (2009–2014)

highlights the international impasse in preventing further global warming.

Yet action seems to be called for: recent research reports shrinking ice

mass balance from both Greenland and Antarctica with a projected sea-

∗We have benefitted from comments by Heski Bar-Isaac, Valentina Bosetti, Jia Chen, Reyer

Gerlagh, Alex Gershkov, Thomas Giebe, Robert O. Keohane, Dan Kovenock, Jianpei Li, and

Philipp Wichardt. This research has been conducted as part of the project Labex MME-DII

(ANR11-LBX-0023-01). Financial support from the University of York Research and Impact

Support Fund is gratefully acknowledged.

†Grenoble Applied Economics Laboratory (GAEL) is a joint laboratory of INRA and the

University of Pierre Mend`

es-France.

CThe editors of The Scandinavian Journal of Economics 2015.

786 Agreeing on efficient emissions reduction

level rise of 1–2 m by 2100.1Because an estimated 180 million people live

currently in locations less than 1 m above sea level, the impact of such a

change on the world economy will be substantial.2In this paper, we study

and answer two questions that arise in this context. How can incentives

be provided to reduce harmful emissions to their socially efficient levels,

while not infracting upon productive efficiency?3How can international

agreement on the parameters of this or similar redistributive mechanisms be

found?

In our simple model environment with additively separable cost of pro-

duction and abatement, there are two ways to reduce emissions – by pro-

ducing less or by abating more; there is no trade in inputs or outputs.

The mechanism we propose plays on these two aspects in order to achieve

efficiency in both: a stylized contest – based on a relative ranking of all na-

tions’ abatement efforts – rewards the countries with the highest abatement

efforts with some share of joint agreement output. In a nutshell, marginal

production is “taxed” to fund a prize pool, and marginal abatement in-

creases the probability of winning a share of this pool. By designing the

contest appropriately, both equilibrium incentives can be set efficiently at

the margin. The precision with which the contest ranking is correct (i.e., the

precision of mutual abatement monitoring) is one of the design parameters

of our proposed mechanism.

In equilibrium, this efficiency inducing contest takes the form of a re-

distributive mechanism, which returns some share of the collected tax pool

in the form of prizes to the participants. As it turns out, for sufficiently

volatile individual GDP, the variance of the redistributed income is lower

than that of standalone individual income, even when the added randomness

through the contest’s prize structure is taken into account. In this case, the

redistributive contest mechanism can fulfill aspects of a mutual insurance

agreement that can entice a country with a sufficiently strong dislike of

income fluctuations to join an agreement on which, in the absence of this

income smoothing argument, it would prefer to free-ride.

The main emissions type we have in mind for our model is green-

house gas (ghg) emissions. These are widely seen as the main contributing

1See, for instance, Dasgupta et al. (2009) or Allison et al. (2009). Mitrovica et al. (2009)

predict less uniform sea-level changes with a rise of up to 6.3 m at some coastal sites in the

northern hemisphere upon a total collapse of the West Antarctic Ice Sheet, because of the

loss of gravitational pull from this ice mass.

2The original estimate of 180 million is from Nicholls (1995); Hanson et al. (2011) estimate

the economic effects of climate change on coastal cities and ports. A recent analysis of

migration induced through climate change is, for instance, Kniveton et al. (2012).

3Both productive and abatement efficiency are defined as the respective levels of efforts,

which maximize social welfare in the absence of information deficiencies or incentive

aspects.

CThe editors of The Scandinavian Journal of Economics 2015.