In this lecture we’re discussing the concepts of negotiation: how to have a Pareto improving outcome, where all of the parties to the agreement are better off than they would be in the business-as-usual trajectory, how to have an agreement that is efficient, mitigating carbon dioxide and other greenhouse gas emissions at low cost, how to have an agreement that is fair, that allocates the costs and benefits in a fair way, recognizing how many standards of fairness we want to apply, and how to have an agreement that is a true learning agreement, adapting not only to climate change but adapting to new science, new technology, and indeed actively promoting learning of new ways to mitigate greenhouse gas emissions.
In this chapter I want to talk about another specific aspect of negotiations and that’s how to make an agreement stick. What are the problems and challenges when an agreement is reached in enforcing that agreement and again I am going to be discussing this issue at a conceptual level, at an abstract level, because I think that the abstractions are quite helpful. And I will take the most important abstraction of game theory or negotiating theory of the last half century to illustrate the issue, and that crucial abstraction is known as the prisoner’s dilemma: a framework of interaction that will be known to many students but that is important for everybody to have some exposure to.
For the rows we have the strategies of the first country, say the developed countries, and they in this simple example can adopt one of two strategies: either to have business as usual energy policy or to have mitigation policy and for country two, those are the columns of this 2 by 2 matrix, and country two, say the developing country group, also has two possible strategies: business as usual or mitigation.
The assumption is that when both parties to this interaction choose to mitigate, they’re both left better off than in the business-as-usual. That of course is the underlying assumption of climate change and the assumption that we have strongly represented throughout this course.
Now in basic game theory or in a representation such as the one you’re looking at, we can use the outcomes for example as a single number to suggest again what happens when various mixes of strategies are followed. And in this two by two box, the first number in each box is the outcome. Call it the gross domestic product for example of country one, or group one, the developed countries. The second number refers to the gross domestic product of the second country, the one whose strategies are represented by the columns of this two by two matrix.
So look at the box of mitigation, the one that is circled here in which both country one chooses mitigation strategy and country two chooses mitigation strategy. In that case, each has a gross domestic product of 130. Again, an arbitrary number, but for purposes of illustration.
Now go directly northwest to the business-as-usual, business-as-usual box. Where country one has not undertaken mitigation policy and country two has also followed suit and not undertaken mitigation policy. In that case, the gross domestic product of these two countries is a 100 and a 100. They’re worse off by virtue of the fact that they have failed to mitigate CO2 emissions. Well so far so good.
Clearly moving from the northwest box to the southeast box according, down that diagonal is a Pareto improvement. Both parties are made better off. It’s like the graph that we looked at earlier, depicted in a different way where one moved from the BAU point to point C, the cooperative point.
And both parties to the negotiation are left better off.
You might say, that’s the end of the story. Unfortunately it’s not quite the end of the story. Consider the situation where both countries have agreed to mitigate and they then go home and plan their national policies. And country one follows through and says, we have a good agreement, we’ll mitigate. Country two says, you know mitigation is pretty expensive actually. And we get some of the benefits of our mitigation, but so does the other part of the world.
It spills over. What would happen if we actually reneged on our promise and we decided that we would carry on with business-as-usual. Maybe we’ll give some nice speeches about the importance of our agreement, but we’ll carry on with the old energy policy?
The outcome is then shown in the lower left-hand side of the box, in the southwest corner. In this case, country undertakes the extra cost of mitigation. Country two does not. And according to the illustration that I’ve made here, country one ends up with a GDP of 80 because it’s made a big outlay of mitigation and the other country has still contributed to wrecking the climate by not undertaking and following through on what it promised to do. The other country is left at a 150.
Yes it bears the climate damage, but it has not undertaken the added expenses of the deep decarbonization. The outcome from a world point of view is worse. Total output is 230, adding 80 and 150. The world suffers as a whole compared to the 260 gross world product of the all mitigation box in the lower right-hand corner.
But the fact that country two reneges on its commitment has left it actually better off and left country one materially worse off. And so one would say, this is not such a stable equilibrium after all, because once the agreement is struck, if it’s possible for country two to wriggle out of the agreement then we would have as you see, a kind of arrow from the lower right-hand box to the lower left-hand box, from the southeast to the southwest. And country two is made better off.
Ah, but of course it won’t stop there. Country one asks itself a question, I have followed through, we have honored our agreement, country two has not, should we continue to follow through or should we revert to a lower cost strategy? Yes, leading to worse climate outcome, but enabling us to avoid this very heavy and very unfair burden that we’re now bearing. And so country one asks itself, what will happen if we now move to business-as-usual contrary to our agreement? Aha, now it’s true the climate is worse off even more but we also thereby escape this heavy burden of deep decarbonization and so we too are going to move from our mitigation profile to a business-as-usual profile.
And that leads the arrow up from the southwest to the northwest. And where does the world end up once again? In the business-as-usual scenario.
It seems paradoxical. Both countries are worse off than if they had followed through on the cooperation. But this is the essence of the prisoner’s dilemma. If there is no way to enforce an agreement, even a Pareto improving agreement that leaves the world with 260 in world product and leaves countries much better off in both cases compared to the business-as-usual where the gross world product is only 200 and each country is worse off than in the cooperative agreement, nonetheless it doesn’t stick.
What is said in formal game theory parlance is that the business-as-usual path or decision-making is actually the dominant equilibrium of this game. Country one best chooses business-as-usual, no matter what country two does. Country two best chooses business-as-usual no matter what country one does. And lo and behold, both countries end up with a wrecked world climate and a wrecked national environment.
It’s paradoxical, but it is the paradox of the prisoner’s dilemma. The question therefore in cooperation in many, many circumstances is not only to identify the Pareto-improving pathway, but to insure that countries, once they reach the agreement cannot renege on it.
Now there are many circumstances where this kind of game theory, prisoner’s dilemma structure might apply. And we’ve not been powerless in the face of this challenge. There are examples one can draw in arms control for instance where both countries are better off if both sides agree to limit their armaments. But the tendency is for one country to renege on its arms control promise if the other is reneging. And both end up being driven to a continuing arms race even though both countries would be better off with a firm and solid and enforced agreement of arms control.
Does this mean that arms control is impossible? No, not at all. It means that one needs to add provisions for monitoring, for verification, for checking on interim steps, for transparency, for closing down various options to renege on an agreement, for institutionalizing a pathway of arms control in that instance or of mitigation in our circumstance so that it’s very costly for countries to make a U-turn or they are quickly exposed and quickly denounced, or in certain circumstances, there are penalties.
Now when two parties make a contract in their economic affairs, a supplier and a buyer for example, and they sign a contract that leaves each better off, perhaps there also would be an incentive for one or the other or both to renege on the contract. But when it’s a commercial contract, typically there’s a court of law in which one party can sue the other party and get enforcement.
And that is a basic mechanism of enforcement s rule of law and a third party enforcer. Perhaps in the end, the sheriff, the prosecutor and a jail sentence for violating a, a contract, or a massive fine.
In the international setting when 193 governments are going to agree on climate terms in Paris, there isn’t a sheriff, there isn’t a prosecutor, there isn’t an international court that can enforce a decision, so we need different mechanisms. What are some of the mechanisms in international treaties, whether it’s arms treaties or climate mitigation treaties?
Well there, there can be penalties imposed in some circumstances. Even financial penalties for example in violating certain trade agreements. There can be opportunities for countries to retaliate. If one country reneges on a promise, the rest of the countries can say, we will not import goods from the country that’s not undertaking climate change mitigation. We’re going to put on border taxes for example. So there are many proposals that are under consideration right now, either for penalties, for forms of retaliation, for trade policy that can help to enforce agreements.
Of course even more important than this typically is the transparency and the reputation of governments and the fact that any kind of U-turn requires a tremendous publicized effort that gives the rest of the world the opportunity to say you must not do that. It’s not foolproof for sure, after all, the United States signed the Kyoto Protocol, though it never ratified it. Other countries that signed and ratified the Kyoto Protocol didn’t live up to it and they were not hauled off to court because there was no court to haul them off.
This is a reality therefore and it is the reason that I want to emphasize that another consideration in addition to efficiency, fairness, adaptability, flexibility is the question of enforceability, reputation, even punishments or retaliation if countries don’t follow through.
We’ll be discussing those options when we talk about these issues in the global online negotiation early next year. It’s not as if there is any ironclad principle in this. But the question of enforcement absolutely will be present because countries will be making so-called legally binding contributions under COP21 and the question is what are they really binding to?