Global Climate Games: How Pricing and a Green Fund Foster Cooperation
Forthcoming in Economics of Energy and Environmental Policy, March 2012.
Peter Cramton and Steven Stoft, May 14, 2011 (Revised 12/01/2011)
Global Energy Policy Center Research Paper No. 11-01.
most efficient global climate policy is to price carbon. The Kyoto-Copenhagen
agenda was intended to do this with a system of international cap and trade. We
view these negotiations as a game in which countries choose their quantity
targets based on self interest. Like the analogous public-goods game, in which
countries choose their abatement levels, we find this game leads to
uncooperative behavior and suggest that this is why the Kyoto approach
By contrast, a game in which all countries vote for a global quantity target or a
global price target can lead to a highly cooperative choice of target. However,
the assignment of responsibilities for a global quantity target stymies
implementation of a global cap. The global-price-target game largely overcomes
this barrier, because a uniform global price provides a focal point for
cooperation. However low-emission countries apparently prefer a much lower
global-price than more prosperous countries unless a Green Fund is implemented.
A game that couples such a fund to the global price target can largely overcome
this barrier to cooperation. We describe such a game along with its equilibrium
outcome, which promises to be inexpensive and cooperative.
Keywords: climate change, cap and trade, green
fund, international environmental agreement