Roy Radner, Leonard N. Stern School Professor of Business, New York University
In the absence of some form of world government, an effective treaty to control global climate change must be self-enforcing. The theory of noncooperative equilibria of a dynamic game provides a good model for such a treaty. These notes will sketch an approach to such a model, in which the players are the approximately 180 sovereign countries of the world, and the goal of the treaty is to control the emissions of greenhouse gases (GHGs), primarily generated in the production and use of energy. Assume that each country is interested in maximizing its total discounted production of goods and services in the foreseeable future, measured, e.g., by gross national product (GDP), net of the damage done by the GHGs Thus the world is faced with the problem of dealing with a classic externality. We characterize a set of (Nash) equilibria of the game, which include “business-as-usual” (no treaty), and Pareto superior treaties with caps on GHG emissions sustained by threats of reversion to business-as-usual. We also expand the game to include: (1) possible contributions to a foreign aid escrow fund used to subsidize increases in the outputs of GHG-free energy by poorer countries; (2) possible trade sanctions against countries that defect from the treaty. I illustrate some partial theoretical results with numerical calculations, and sketch some desired directions for future research.