The Theory Of International Environmental Agreements

 13 April 2021      

Keywords: International Agreements on the Environment, Parasitism, Treaties Achieving efficiency for many global environmental problems requires voluntary cooperation between sovereign countries due to environmental pollution. The theory of international environmental agreements (IAAs) in the economy attempts to understand how to facilitate cooperation between countries in reducing pollution. However, the reason why cooperation takes place, while non-cooperation seems individually rational, has been an economic issue for at least half a century. The problem is that the theory suggests a fairly small contribution (even zero) to a public good and high levels of free riding. Empirical experiments and evidence with individuals suggest a higher degree of cooperation. This is one of the main reasons for the emergence of the literature on social preferences (also known as “Other Preferences” or “prosociality”) in the 1990s and more recently, where participants are responsible for both their own well-being and that of others. This document links the literature on cooperation between countries with the literature on cooperation between individuals. In particular, we are introducing social preferences into a model of international environmental agreements. By emphasizing Charness-Rabin`s social preferences, we find that these preferences expand the conditions under which cooperation is individually rational, although these preferences also reduce the size of an IEA`s balance for mitigation reduction. Although stable coalitions are smaller, some countries may make more concessions outside the coalition structure. Unlike much of the literature, we treat the size of active substances as heterogeneous.

The size of a country has no influence on incentives to form a coalition, but it has an impact on the overall level of weakening, indicating that coalitions of large countries are more effective than coalitions of small countries. The literature on the economics of international environmental agreements has been developing over the past two decades. Significant progress has been made. However, some simple and fundamental questions remain unanswered, such as the Schelling paradox, that intertemporal environmental agreements that benefit developing countries should be easier to achieve than development assistance agreements without an intertemporal dimension. This chapter provides a general overview of what we learned from the literature on the economics of international environmental agreements and the impact of this literature on the real world of environmental agreements. Four possible anomalies are identified between the theory of international agreements and empirical evidence. (1) Why do some countries seem willing to act unilaterally, when it is not individually rational in the standard sense? (2) Why is country income theoretically ignored when it is a dominant theme in the “real world”. (3) Why does the theory predict more parasitism than found in experimental work, or even the occasional empiricism of actual contract experience? (4) Why, in theory, the increase in the benefit/cost ratio of the reduction tends to reduce the size of contracts, but has the opposite effect in the experiments.

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