Ottmar Edenhofer: Deputy Director and Chief Economist at the Potsdam Institute for Climate Impact Research


Tuesday, March 1, 2016, 4:30pm


216 Aaron Burr

The Strategic Dimension of Financing Global Public Goods

Ottmar Edenhofer is Deputy Director and Chief Economist at the Potsdam Institute for Climate Impact Research (PIK), Professor of the Economics of Climate Change of the Technical University Berlin and Co-Chair of Working Group III of the Intergovernmental Panel on Climate Change (IPCC). Moreover, he is director of the Mercator Research Institute on Global Commons and Climate Change (MCC).

When multiple countries provide a global public good, international transfers can address distributional problems that arise when countries differ in their national properties. By balancing heterogeneous costs and benefits of providing the good, national efforts become internationally comparable. However, in the absence of an international institution with the authority to enforce a redistribution scheme, it needs to be in the self-interest of each country to both provide the public good and engage in transfer payments. To render payments individually optimal, we introduce transfers within a multilateral compensation fund that are strategic: The level of payments is conditional on each country’s contribution to the global public good. Recipient countries are hence compensated for increasing costs while donor countries benefit from a higher level of the good. Within a standard analytical model, we show that marginal transfers determine how ambitious the voluntary contributions to the public good can be and in how far free-riding incentives to ambitious targets can are shaped. From a policy perspective, we then analyze specific designs of strategic transfers – ranging from an international fund of fixed size to a fund that fully compensates for differences in abatement costs – and show which approaches have a larger chance of raising the voluntary contribution of the public good. Our results are important for organizing international transfers in a more effective way, addressing challenges such as climate change mitigation.