Game Comparison: Cap vs. Price

The Cap-and-Trade Game   (See Research Report 10-04 for details)

Until April 2010, no one had analyzed global cap-and-trade as a game. Here are the result:
  • Polarization: Big, rich countries abate even more, and small, poor countries do less than nothing.
  • Reduced Total Abatement: The combined effect is less total abatement.
  • The global carbon price falls to P*/N, where P* is the ideal price and N is the number of countries.

The polarization of developed and developing countries is what wrecked the Copenhagen summit. Except for China (which is a large emitter) all developing countries are small emitters and poor. As game theory predicts, when cap and trade is the proposed global policy, they want to do less than nothing. In other words they want to be paid for what they do and have their projects benefit them as well as the climate.

I don't blame them, but the problem is that this disrupts the cap-and-trade approach and results in a highly inefficient Green-Fund subsidy approach instead (Nationally Appropriate Mitigation Measures).

What Exactly Is the Cap-and-Trade Game?

It's the standard climate, public-goods game with cap-and-trade rules added on. It has three rules:

The Cap-and-Trade Game:

  1. A country's climate benefit depends on total abatement, = the sum of all country abatements, Ai
  2. The cost of a countries climate policy depends on its abatement,  Ai, and its net import of carbon credits, P×(Ti – Ai), where P is the global carbon price, and Ti is the countries abatement target.
  3. Each country chooses Ti on its own.

It's the same as the famous "public-goods" (PG) game, except countries pick targets instead of abatement levels and they can meet these targets by buying carbon permits from countries that over-achieve their targets.

You might think that all countries would chose a target of zero, or even a negative target, so that they can sell more carbon permits to other countries at a profit. This does not happen. In fact, if all countries are identical they do exactly the same thing as they do in the PG game.

Some will object that countries cannot choose their targets, but must abide by some treaty. However, if a treaty can assign them a target it could assign them an abatement level without cap and trade. So the first question should be, does cap and trade on its own cause countries to cooperate more or less. Unfortunately, the answer is "Less."