What kind of incentive structure will increase the chances that individual agents make decisions resulting in the best possible outcome for all? In the absence of efficient external enforcement structures, future treaties protecting global public goods will need to be self-enforcing: the mechanisms that govern decision-making should be designed to make compliance attractive and dissuade evasion.
As unregulated human activities accelerate environmental exploitation and pollution, our global ecosystem is rapidly degrading. This could continue until exploitation leads to complete environmental collapse, and virtually no benefit can be produced any more. The fate of humanity depends on collective choices about our environment, from the control of air pollution to the preservation of the rainforests. Cooperation is necessary to avoid the overexploitation of our ecological system as well as ensure climate control.
Unfortunately, collaborative action towards collective benefits can often come into conflict with personal interest: the most profitable choice for an individual does not always produce the best outcome for a community.
Fisheries provide a clear example. Many experts warn that global fish stocks will collapse soon if every commercial fishing boat works continuously at maximum capacity in international waters. Yet although it is in the collective interest that everyone reduces the amount that they fish, in the absence of certainty regarding the behavior of others, it is in an individual agent’s best interest to overfish.
The expression ‘tragedy of the commons’ describes such a situation, where the pursuit of self-interest by each agent produces an inferior outcome for all. This type of situation challenges a major tenant of neoclassical economics that links independent pursuit of self-interests to economically efﬁcient outcomes, and presents a bleak prospect for the future of humanity.
We would all be better off cooperating to preserve the health of the global commons, particularly our global environment. If we want this to happen, the mechanisms that determine how individual choices are made in collective settings are of the greatest importance.
Reducing global carbon emissions is optimal for collective good. The Paris Climate Agreement ratified by major polluters last year presents future action plans, but their effectiveness hinges on voluntary control of carbon pollution. Commitment to carbon emission reduction from states remains to be proven, and no mechanism in the current agreements guarantees serious participation. The treaty lacks any enforceable measures for emission control and includes no specific time frame. From the start, there is no mechanism for setting a mandatory target, and if a set target is not met, there is no penalty or fiscal sanctions, whether a carbon tax or other disadvantages.
In the absence of any binding mechanism to measure and control emission gases, the effectiveness of the Paris treaty is in doubt. It is especially so given the potential costs involved to support actions for emission reductions, such as subsidies for transition to a fossil fuel free economy.
The choices of individual actors will affect whether the Paris Climate Treaty succeeds or fails. What is required to increase the chances of a positive outcome? Part of the answer can be provided by game theory, which helps understand the conditions for the production of a collective good that benefits all.
The situation we describe is one where collective benefit occurs only when a sufficient number of participants commit to certain actions. Participants have to voluntarily pay a certain cost in order to produce a benefit that will be shared by all, regardless of individual efforts. In this case, the effectiveness of the Paris agreement depends on the number of actors seriously committed to climate control, but the benefit of a stable climate will not be denied to those who do not share in any of the costs.
This situation creates an incentive for some to simply evade their share of contribution – what economists call a free ride option. The possibility of such a free ride encourages non-cooperative behavior that produces a less desirable outcome for all.
This is especially true when the number of free riders begins to grow. In terms of individual cost-benefit analysis, ‘rational’ players will prefer to benefit at no cost from a collective good created by others who bear the associated costs. However, that public good is available only when a sufficient number of actors choose to contribute efforts. Those who prefer to commit therefore face the following dilemma: when fewer actors than required contribute efforts, no one gets anything. The contributors only bear costs, since the overall level of collective efforts is too low for a benefit to be created.
As long as the number of committed actors is below a certain threshold, it is economically rational to contribute nothing. When everyone pollutes, a few committed actors have no impact on the outcome. But as we approach a tipping point, the choices of non-contributors make a huge difference. Near the tipping point, the switch of just one actor towards contribution can lead to the production of a collective good that benefits all. By no longer evading their responsibilities, additional contributors improve their own welfare as well as others’. However, the reverse is true: if a contributor chooses to shirk their responsibility near the tipping point, the increase in the number of defectors can gradually quicken gravitation towards universal defection.
“Future negotiations on climate change must include discussions on effective incentive mechanisms as well as penalties to violators, so that agreements can become self-enforcing.”
The future welfare of humanity on the planet thus depends on the existence of an adequate number of actors seriously committed to the control of emission gas production.
In a collective decision-making setting, such as we the one that characterizes current climate negotiations, the way that individual actions add up to produce a particular outcome is of crucial importance. This outcome is determined by the number of participants who take the same action, whether they choose cooperation towards a collective good to be shared with others, or defection for their own selfish gain. To that end, future negotiations on climate change must include discussions on effective incentive mechanisms as well as penalties to violators, so that agreements can become self-enforcing.
The major premise of many international agreements is that they cannot be easily enforced. They are built on consensus, allowing a participating state to reject any part of the negotiated outcomes that is unfavorable to them. Moreover, there is no assurance that these agreements will be respected, even after each country signs them. In the absence of any enforcement mechanism, it is therefore important to design self-enforcing agreements in the first place.
An international agreement becomes self-enforcing when incentives exist to adhere to it. The future success of global climate control depends on an effective strategy to move a sufficient number of non-committers towards anti-pollution measures through adequate incentive structures. No effective global strategy can emerge as long as a large number of non-committers believe that the cost of acting to protect the environment outweighs expected benefit.
A first step is to provide direct benefits to some of the participants. For instance, contribution to the creation of a collective good can be linked to something of value to that actor. This could be transfer of resources and new cleaner technologies to the developing world, or a trading mechanism that allows developing countries to sell their emission rights to industries in developed countries, with income redistribution effects.
In addition, support for an agreement may be contingent upon special compensation for those who have to share a larger burden. Preserving rainforests represents a case of ‘voluntary dilemma’. Some countries with large areas of rainforest have to be willing to sacrifice their economic interests for the benefit of others on the planet. The types and levels of compensation for their actions have to be negotiated at a multilateral level. Debt relief, technology assistance or other forms of aid are often offered as part of positive redistribution measures or cost mitigation for reluctant actors in such scenarios.
In order to make cooperation become a reasonable choice, the payoffs for a free rider should become unprofitable. One way of altering the status quo is to preclude free riders from benefit. Though free riders cannot be excluded from the general benefits of a stable climate, non-cooperators could be excluded from other benefits such as the transfer of technology and financial aid as well as access to international markets. This has been a major feature of multilateral treaties on the protection of endangered species and the protection of the ozone layer.
In current climate change negotiations, there are two main opposing positions represented by pro-agreement states and veto states. Their opposition spans across cost sharing and control methods. To move out of an asymmetric deadlock, it is essential that the coalition against environmental pollution is able to successfully manipulate the preferences of veto states. For this, the pro-agreement coalition may have to offer something attractive to a member of the veto coalition, or it should have an ability to sanction non-cooperators. Failing this, it will be difficult to establish a strict climate control agreement, due to the limited ability of the pro-agreement side to lower the payoffs of the anti-agreement coalition.
In the end, the possibility to find a mutually acceptable solution will depend not only on the recognition of converging interests, but also on the development of a formula to bridge the gap between opposing interests. Developing incentive structures that increase the rationality of collectively beneficial choices and embedding them in all international agreements on climate preservation is an effort that should be given the highest priority today.