Game Theory and International Climate Change Negotiations ISSUE FINDING MEMO PRESENTATION (PATRIOT GAMES – EVAN WILLIAMS, MATT GUNDERSON, & TOM GARLAND) 15 October 2014

Timeline for climate change negotiations ( ) UN Framework Convention on Climate Change signed Kyoto Protocol signed – developed countries accept binding targets for carbon emissions for 2012 and 2020 US policy changes – will not ratify the Kyoto Protocol First commitment period for Kyoto Protocol (when developed countries need to hit their first carbon target or face penalties) EU implements EU Emissions Trading Scheme signatories ratified Kyoto – comes into force Canada withdraws from Kyoto Protocol 2012

Categorization of countries in the UNFCCC Industrialized Economies In Transition Annex I (Rich) Developing Least Developed Countries (LDCs) Non-Annex I (Poor) GDP/CapitaEmissionsExamples High US, UK, Japan, EU, Canada, Australia etc (29 total) Medium Russia other former members of USSR (14 total) Low China, India, Brazil, Mexico etc (~ 100 total) Very Low Lao PDR, most of sub-Saharan Africa (49 total) Vast majority of historical emissions Tiny fraction of historical emissions

Calculating the payoffs of taking action on climate change Act now (“prevention better than cure”) Act later (“deal with the costs later” Global GDP (1992)60 Baseline economic growth projection (where world would be if climate change was not an issue) 152 Cost to avoid climate change (short-term) -20 Cost of dealing with effects of climate change (long-term) 0-77 Global GDP (2050)15075 Clearly better for the environment and the economy

2050 payoffs for rich and poor countries in mid-1990s climate change negotiations Poor Countries (non-Annex I) Rich Countries (Annex I) Act now Act later Act nowAct later Green growth Rich: 100 Poor: 50 Global: 150 Green equity Rich: 70 Poor: 65 Global: 135 Carbon colonialism Rich: 85 Poor: 35 Global: 115 Carbon wasteland Rich: 50 Poor: 25 Global: 75 Mid-90s baseline Rich: 40 Poor: 20 Global: 60

Why do developed countries decide to act unilaterally – dominant strategy to act now Poor Countries (non-Annex I) Rich Countries (Annex I) Act now Act later Act nowAct later Green growth Rich: 100 Poor: 50 Global: 150 Green equity Rich: 70 Poor: 65 Global: 135 Carbon colonialism Rich: 85 Poor: 35 Global: 115 Carbon wasteland Rich: 50 Poor: 25 Global: 75 Mid-90s baseline Rich: 40 Poor: 20 Global: 60

Poor countries – what you want to do will depend on what rich countries will do Poor Countries (non-Annex I) Rich Countries (Annex I) Act now Act later Act nowAct later Green growth Rich: 100 Poor: 50 Global: 150 Green equity Rich: 70 Poor: 65 Global: 135 Carbon colonialism Rich: 85 Poor: 35 Global: 115 Carbon wasteland Rich: 50 Poor: 25 Global: 75 Mid-90s baseline Rich: 40 Poor: 20 Global: 60

..but given dominant strategy of rich countries to act now, poor countries will push for equity Poor Countries (non-Annex I) Rich Countries (Annex I) Act now Act later Act nowAct later Green growth Rich: 100 Poor: 50 Global: 150 Green equity Rich: 70 Poor: 65 Global: 135 Carbon colonialism Rich: 85 Poor: 35 Global: 115 Carbon wasteland Rich: 50 Poor: 25 Global: 75 Mid-90s baseline Rich: 40 Poor: 20 Global: 60

Poor countries – and ‘carbon colonialism’ would never have been accepted given ethics (and the military might of certain poor countries) Poor Countries (non-Annex I) Rich Countries (Annex I) Act now Act later Act nowAct later Green growth Rich: 100 Poor: 50 Global: 150 Green equity Rich: 70 Poor: 65 Global: 135 Carbon colonialism Rich: 85 Poor: 35 Global: 115 Carbon wasteland Rich: 50 Poor: 25 Global: 75 Mid-90s baseline Rich: 40 Poor: 20 Global: 60

Equilibrium is for Green Equity scenario: rich act now, poor act later Poor Countries (non-Annex I) Rich Countries (Annex I) Act now Act later Act nowAct later Green growth Rich: 100 Poor: 50 Global: 150 Green equity Rich: 70 Poor: 65 Global: 135 Carbon colonialism Rich: 85 Poor: 35 Global: 115 Carbon wasteland Rich: 50 Poor: 25 Global: 75 Mid-90s baseline Rich: 40 Poor: 20 Global: 60

But this is a sub-optimal outcome! The question facing negotiators How can you change the game to give poor countries an incentive to start fighting climate change now?

The answer: the Clean Development Mechanism Rich countries Meet their carbon target at a lower cost Poor countries Poor countries get access to capital and cutting edge technology so that they can develop more rapidly Leapfrog dirty carbon technology Clean Development Mechanism (CDM) Rich countries fund deployment of cutting edge clean technology in poor countries

Hoped that CDM would change payoffs to create new equilibrium of green & equitable growth Poor Countries (non-Annex I) Rich Countries (Annex I) Act now Act later Act nowAct later Fair green growth Rich: Poor: Global: 150 Green equity Rich: 70 Poor: 65 Global: 135 Carbon colonialism Rich: 85 Poor: 35 Global: 115 Carbon wasteland Rich: 50 Poor: 25 Global: 75 Mid-90s baseline Rich: 40 Poor: 20 Global: 60

But it didn’t work – a critical group of industrialized economies pulled out Followed through Pulled Out Industrialized economies US, Canada, Australia EU, Japan Saw carbon constrained world as a game they could win  Looser Kyoto targets  Limited fossil fuel interests Saw carbon constrained world as a game they would lose  Tighter Kyoto targets  Significant fossil fuel interests  US – lost domestic political support & suffered diluted geopolitical strength

Conclusion – What does game theory teach us here?  Understanding the payoff and incentives at the initial negotiating table  Following the initial outcome, game theory allowed participants to redesign the game in order to align individual country incentives with the socially optimal outcome  Game theory also helps us explain why the mechanism broke down  Understanding how countries see payoffs evolving over time (e.g. the EU benefited from the addition of the Eastern Bloc)  Understanding the change in policy by the US – it sees carbon as one piece in a larger game of geopolitical chess  Point for further inquiry – how could game theory help us fix the mechanism and reach a socially optimal outcome?

Appendix

Why didn’t it work? Changes in US Political Focus

Why didn’t it work? Chinese GDP Growth: Actual vs Target Sources: Central People's Government of the People's Republic of China, IMF; as of 03/05/2012. IMF estimated growth rates are based on constant 1990 prices in Chinese yuan