3/31/2015

Bartering Emissions


There is an upcoming climate change summit in Paris. According to a Mashable article about President Obama’s plan for the summit he has announced that before the summit that America is going to increase its commitment to reducing greenhouse gas emissions. If reducing emissions is the source of utility and the nations are colluding to maximize utility, is it possible that the president could be leveraging a first mover advantage?

The president is also encouraging other nations to also announce their commitments before the official negotiations begin. Knowing that the US was planning to reduce emissions may incentivize other nations to rely on the US to make reductions while increasing their own emissions. It appears that the president may have given a second mover advantage to the other nations. Other nations may be reluctant to make large reductions if they can rely on larger American reductions.

The climate change summit in an interesting game theory case.  The convention may not produce a formal treaty. A treaty would have to be passed in congress, and may not be ratified. As pointed out in the article the convention will need “some mechanism” to induce large enough commitments to reach what the UN considers a necessary threshold. Climate change issues seem to constitute an endlessly repeated game or a game with an uncertain ending period. This may help the nations find an equilibrium point with all nations making large reductions.

3 comments:

Dave Tufte said...

Ty: 94/100 (it's a congress, but you're talking about a treaty being approved by the Congress).

All negotiations are a form of game theory, and there's actually a bit literature in political science using game theory to think about treaties.

I like all the pieces of stuff you've brought up Ty. But I'm not sure if Obama's position is one of first mover advantage: you even seem to play that down in the second paragraph.

Typically, being a first mover is advantageous when you can corner or reserve some worthwhile thing. I find it hard to see what that could be in this case.

On a positive note, you might argue that this is more like a Stackleberg equilibrium, and Obama is exercising something akin to price leadership.

On a negative note, you might argue that it is first mover advantage, and the resource they're cornering is the moral high ground. I may be cynical, but even a lot of Obama's supporters in D.C. suggest that moral preening is big part of what make the current administration tick.

Andy Dufresne said...

This is certainly not like a Stackleberg Model. The Stackleberg model states that the leader chooses a quantity and that decision is irreversible. Then the followers choose a quantity after observing the leader’s quantity. The leader is supposed to profit from this situation knowing that follower will have to adjust their output. But when we deal with climate talks and decisions to change output, it doesn’t really matter because countries are purposely ambiguous on exactly just what they are agreeing on. Just take a look at China’s commitment to cap its carbon dioxide emissions. They “intend” to cap emissions “around” 2030. They didn’t put anything in writing!
Wouldn’t the leader just change their quantity decision after the followers made their quantity decision, and then this would all dissolve into a Cournot equilibrium or something like it? But then we haven’t considered costs yet, either. Costs certainly would not be symmetric, with some countries having higher costs than others to produce just one less unit of “emission.” I think economically it is all about timing and trying to persuade your followers by showing your hand early. I would think all the models would dissolve after this, since it seems it’s all talk and no actual action.

Dave Tufte said...

Andy: 50/50

I wouldn't say "certainly not" a Stackleberg model. There are a lot of variations on that which don't make it into an MBA level text.

Also note that I wrote "you might argue" and "more like" and "akin to". I put those wiggle words in there because I want you folks to consider the idea. Andy's view is that its assumptions are soundly rejected, and I don't disagree (I do wonder how much we can wiggle the assumptions though, and still get Stackleberg).

The really great point that Andy makes is that the whole thing will devolve down to Cournot-Nash. In face-to-face classes I point out that Cournot-Nash and perfect competition sound restrictive on paper, but that in practice they're like the oil pan at the bottom of a car's engine: eventually everything gets down to that level.

What I wonder about situations like this (and I'm not much of a game theorist, although I dabbled quite a bit in graduate school) is whether government positions attract people who are inclined to view themselves as the Stackleberg leader? Do they then act that way whether it works or not? If it works, we get a Stackleberg leader-follower situation for a while, that eventually devolves into Cournot-Nash. And if doesn't work, we devolve to Cournot-Nash much more quickly. They then trumpet their Stackleberg outcomes as successes, while the voters get used to just about everything looking like Cournot-Nash. And perhaps our disappointment with the political process is that we've drunk too much of the kool-aid that the person we voted for is capable of producing the benefits of Stackleberg leadership?