Stability of international environmental agreements under isoelastic utility

What is it about?

There is now a growing consensus that ratifying International Environmental Agreements (IEAs) is the most effective way to tackle transboundary pollution problems. While the Social Benefit Function (SBF) critically affects emission choices as well as decisions to ratify IEAs, the related economic literature has mainly concentrated on scenarios where the marginal SBF is linear. Using climatic data, I find that the linear marginal SBF case does not match data and isoelastic SBFs fit data better. In the more realistic, but not yet explored, context of isoelastic SBFs, I reconsider incentives to ratify IEAs. My analysis gives rise to novel conclusions. For instance, changes in the scale of damages do not affect the level of cooperation. When the scale of damages is small, variations of the SBF parameter reveal that large coalitions including the coalition of all countries are stable, but only when the potential gain from cooperation is sufficiently high.

Featured Image

Why is it important?

Transnational externality problems (e.g., air pollution, bacterial infections, and shared waters) have become pressing concerns for policy makers as they entail serious threats to public health and the provision of ecosystem services. Due to the global public nature of such issues, a country cannot achieve a desired outcome by acting alone. A growing consensus on this challenge has led to the design of a wide array of international environmental agreements (e.g., the Paris Climate Agreement) aimed at cooperatively addressing global environmental problems. Since countries are sovereign, there is no supranational authority to enforce environmental protection. As such, the agreements must be self-enforcing (i.e., each country must ratify the agreements only if it is beneficial to do so). While around 600 IEAs have been elaborated and a substantial body of economic research has examined international environmental problems, incentives to ratify IEAs are not yet fully understood. The goal of this paper is to examine how isoelastic SBFs affect incentives of sovereign countries to ratify self-enforcing IEAs. Despite evidence that individual preferences critically affect the provision of global public goods, most economic papers on IEAs concentrate on the linear marginal social benefit function case. This paper breaks new ground by concentrating on scenarios where countries have isoelastic gross benefit functions. In a real world setting, countries always pollute, and I argue that isoelastic benefit functions are more consistent with this empirical evidence. Using data on GPD per capita as a proxy for social welfare, my empirical analysis shows that the class of isoelastic benefit functions matches data better relative to the linear marginal social benefit function case. In addition to concentrating on scenarios where countries are identical and the damage function is quadratic, I adopt the Stackelberg approach with smooth payoff functions. To the best of my knowledge, the effects of isoelastic SBFs on incentives to ratify IEAs have never been addressed.