Political influence on non-cooperative international climate policy

We analyze non-cooperative international climate policy in a setting of political competition by national interest groups. In the first stage, countries decide whether to link their domestic emission permit markets to an international market, which only forms if it is supported by all countries. In the second stage, countries non-cooperatively decide on the number of tradable emission allowances. In both stages, special interest groups try to sway the government in their favor. We find that (i) both the choice of regime and the levels of domestic and global emissions only depend on the aggregate levels of organized stakes in all countries and not on their distribution among individual interest groups and (ii) an increase in lobbying influence by a particular lobby group may backfire by inducing a change towards the lobby group's less preferred regime.     

Voluntary corporate environmental initiatives and shareholder wealth

Researchers debate whether environmental investments reduce firm value or actually improve financial performance. We provide some compelling evidence on shareholder wealth effects of membership in voluntary environmental programs (VEPs). Companies announcing membership in EPA's Climate Leaders, a program targeting reductions in greenhouse gas emissions, experience significantly negative abnormal stock returns. The price decline is larger in firms with poor corporate governance structures, and for high market-to-book (i.e., high growth) firms. However, firms joining Ceres, a program involving more general environmental commitments, have insignificant announcement returns, as do portfolios of industry rivals. Overall, corporate commitments to reduce greenhouse gas emissions appear to conflict with firm value maximization. This has important implications for policies that rely on voluntary initiatives to address climate change. Further, we find that firms facing climate-related shareholder resolutions or firms with weak corporate governance standards – giving managers the discretion to make such voluntary environmentally responsible investment decisions – are more likely to join Climate Leaders; decisions that may result in lower firm value.     

International environmental agreements with support

We augment the standard cartel formation game from non-cooperative coalition theory, often applied in the context of international environmental agreements, with the possibility that singletons support coalition formation without becoming coalition members themselves. We assume their support takes the form of a monetary transfer to the coalition, in order to induce larger coalitions, higher levels of public good provision and higher payoffs. We show that, under mild conditions on the costs and benefits of contributing to the public good (e.g. abatement of greenhouse gas emissions), there exist equilibria with support. Allowing for support increases payoffs to each of three types of agents: members, supporters and free-riders.     

Voluntary corporate environmental initiatives and shareholder wealth

Researchers debate whether environmental investments reduce firm value or actually improve financial performance. We provide some compelling evidence on shareholder wealth effects of membership in voluntary environmental programs (VEPs). Companies announcing membership in EPA's Climate Leaders, a program targeting reductions in greenhouse gas emissions, experience significantly negative abnormal stock returns. The price decline is larger in firms with poor corporate governance structures, and for high market-to-book (i.e., high growth) firms. However, firms joining Ceres, a program involving more general environmental commitments, have insignificant announcement returns, as do portfolios of industry rivals. Overall, corporate commitments to reduce greenhouse gas emissions appear to conflict with firm value maximization. This has important implications for policies that rely on voluntary initiatives to address climate change. Further, we find that firms facing climate-related shareholder resolutions or firms with weak corporate governance standards – giving managers the discretion to make such voluntary environmentally responsible investment decisions – are more likely to join Climate Leaders; decisions that may result in lower firm value.     

Negotiating environmental agreements under ratification constraints

We analyze the impact of ratification constraints on the optimal terms of international environmental agreements (IEAs). For this, we combine the literature on IEAs with the public choice literature on two-level games. By also incorporating uncertain preferences of the pivotal voter in the ratification stage, we make several important contributions: (i) we contribute to a more realistic modeling of the temporal structure of international agreements, (ii) we show a surprising, yet intuitive non-monotonic relationship between the optimal commitment level and the variance of ratification decisions, (iii) we identify reasons to expect a larger number of countries to join international negotiations than predicted by most of the coalition formation literature based on a representative agent model. Ratification constraints thereby can improve the welfare gains from stable international agreements.     

Cost-effective unilateral climate policy design: Size matters

Given the bleak prospects for a global agreement on mitigating climate change, pressure for unilateral abatement is increasing. A major challenge is emissions leakage. Border carbon adjustments and output-based allocation of emissions allowances can increase effectiveness of unilateral action but introduce distortions of their own. We assess antileakage measures as a function of abatement coalition size. We first develop a partial equilibrium analytical framework to see how these instruments affect emissions within and outside the coalition. We then employ a computable general equilibrium model of international trade and energy use to assess the strategies as the coalition grows. We find that full border adjustments rank first in global cost-effectiveness, followed by import tariffs and output-based rebates. The differences across measures and their overall appeal decline as the abatement coalition grows. In terms of cost, the coalition countries prefer border carbon adjustments; countries outside the coalition prefer output-based rebates.     

Self-enforcing environmental agreements and trade in fossil energy deposits

The literature on self-enforcing environmental agreements (SIEAs) focuses on de- mand-side emission-reduction policies. To our knowledge, Harstad (2012) is the only study on SIEAs, in which countries purchase fossil-energy deposits to prevent their exploitation. He finds that for any coalition size there exists a (small) subset of parameters, different for each size, such that the coalition of that size is stable. However, the comparison of Harstad's results with the prevailing demand-side SIEA analyses is hampered by major differences in the structure of the respective game models. This paper develops a game model with a deposit market and deposit purchases for preservation that is in line with some demand-side SIEA literature. It turns out that either no coalition is stable or the grand coalition is the only stable coalition. We compare the outcome of our model not only with Harstad's model but also with Eichner and Pethig's (2015) model of the formation of SIEAs in which climate policy takes the form of (demand-side) emissions taxes.     

Flattening the carbon extraction path in unilateral cost-effective action

Internalizing the global negative externality of carbon emissions requires the flattening of the extraction path of world fossil energy resources (=world carbon emissions). We consider governments with sign-unconstrained emission taxes at their disposal and seeking to prevent world emissions from exceeding some binding aggregate emission ceiling in the medium term. Such a ceiling policy can be carried out either in full cooperation or by a sub-global climate coalition. Unilateral action has to cope with carbon leakage and high costs, which makes a strong case for choosing a policy that implements the ceiling in a cost-effective way. In a two-country, two-period general equilibrium model with a non-renewable fossil-energy resource, we characterize the unilateral cost-effective ceiling policy and compare it with its fully cooperative counterpart. We show that with full cooperation there exists a cost-effective ceiling policy in which only first-period emissions are taxed at a rate that is uniform across countries. In contrast, the cost-effective ceiling policy of a sub-global climate coalition is characterized by emission regulation in both periods. The share of the total stock of energy resources owned by the sub-global climate coalition turns out to be a decisive determinant of the sign and magnitude of unilateral cost-effective taxes.     

Coalition formation in fisheries with potential regime shift

A system can undergo rapid regime shift in which the growth of natural resources suddenly and permanently declines. We examine how the threat of such a shift alters the strategic management of a common pool renewable resource. We consider exogenous and endogenous threats and examine their effects on both incentives to join a coalition and harvest decisions. We find that an exogenous threat of reduced resource growth may cause the coalition to grow in size, and, perhaps of most interest, we identify conditions under which members of the stable coalition reduce harvest while non-members increase harvest in response to the threat. In contrast, an exogenous threat of total stock collapse may destabilize coalitions, resulting in higher harvest from former members, but reduced harvest by non-members. When the threat of either type of shift is endogenous, the threat of regime shift can induce stable coalitions with more than two members. In particular, we identify cases in which the first best (full cooperation) is sustained as an equilibrium outcome. Finally, we find that the relation between the magnitude of the shift and the size of stable coalitions may be negative.     

International externalities, strategic interaction, and domestic politics

Domestic politics can sometimes play an influential role when externalities have strategic and international implications. If voters delegate the choice to policymakers and if individual countries independently determine their environmental policy using a consumption tax on the emissions generating good, the result could be an outcome that is inferior to the one preferred by the median voter in the absence of delegation. On the other hand, if the international externality is unilateral in nature, rather than reciprocal, we find that delegation is largely irrelevant, since voters’ choice of policymaker is no longer strategic in character. Similarly, if voters anticipate policymakers successfully coordinating their policies at a later stage, there also will be no difference between the policymakers’ and the median voters’ aggregate weighting of environmental emissions.     

An infinite-horizon model of dynamic membership of international environmental agreements

Much of the literature on international environmental agreements (IEAs) uses static models, although most important transboundary pollution problems involve stock pollutants. The few papers that study IEAs using models of stock pollutants do not allow for the possibility that membership of the IEA may change endogenously over time. In this paper we analyse a simple infinite-horizon version of the static model of self-enforcing IEAs, in which damage costs increase with the stock of pollution, and countries decide each period whether to join an IEA. Using a quadratic approximation of the value function of the representative country we show that there exists a steady-state stock of pollution with corresponding steady-state IEA membership, and that as the stock rises towards steady state the IEA membership falls. Moreover, we find that the greater is the cost of damage, and hence the greater are the potential gains from cooperation, the smaller is the membership of a self-enforcing IEA.     

A decomposition analysis of CO2 emissions: evidence from Malaysia’s tourism industry

The most important question raised from issues of environmental degradation is how economic activities bring about changes that will result in pollution. In the pursuit of tourism economy, contrary to popular interest, the travel and tourism (T&T) industry may cause environmental damages through the emissions of carbon dioxide (CO₂) from energy consumption in areas such as transportation and delivery of amenities. Given this major concern, this paper attempts to investigate the linkage between tourism and CO₂ emissions in Malaysia between 1981 and 2011. In particular, this study fills the knowledge gap by taking a closer look at the impact of international tourist arrivals on CO₂ emissions by sector – electricity and heat generation and transport. Results from the bound test method suggest that there exists a long-run relationship among the variables under consideration when CO₂ emissions become the dependent variable. The original result is similarly robust to alternatives, which are CO₂ emissions from sectors of electricity and heat generation and transport. Furthermore, the vector error correction model causality analysis indicates a causal relationship between tourism and CO₂ emissions by transport and electricity and heat generation. Subsequently, several tourism-related policies are drawn from these findings.     

Strategic environmental disclosure: Evidence from the DOE's voluntary greenhouse gas registry

Although mandatory disclosure programs have been studied extensively, strategic voluntary environmental disclosures by firms are not well understood. We study the motivations for and impacts of firms' strategic disclosure of greenhouse gas reductions to the US government. We first model firms' joint abatement and disclosure decisions, incorporating both economic and political incentives. We then use data from the Department of Energy's Voluntary Greenhouse Gas Registry to compare reported reductions to actual emissions. We find that participants in the program engage in highly selective reporting: in the aggregate, they increase emissions over time but report reductions. In contrast, non-participants decrease emissions over time. Participants tend to be large firms facing strong regulatory pressure; pressure from environmental groups reduces the likelihood of participation, suggesting such groups viewed the program as a form of greenwash. Participating in the 1605(b) program had no significant effect on a firm's changes in carbon intensity over time.     

The reproductive consequences of male cooperation in the red howler monkey: paternity exclusion in multi-male and single-male troops using genetic markers

Summary Variance in male reproductive success in single and multi-male red howler (Alouatta seniculus) troops was examined through paternity exclusion using genetic markers. Coalitions of relatives were compared to coalitions of non-relatives with regard to duration, stability, and number of offspring expected for each participant based on paternity exclusion results. No evidence of paternity by males living outside of the troop was found. In multi-male troops, only the dominant male was found to father offspring conceived during his tenure. This was the only male observed to mount females. In both troops examined genetically wherein a status change had occurred, paternity changed with status. Coalitions of relatives and potential relatives lasted significantly longer than coalitions of non-relatives, and experienced fewer status changes between males. A direct advantage of forming a coalition for both dominant and subordinate red howler males resulted from the superior competitive ability of coalitions over single males in establishing and maintaining tenure in the limited number of female troops in the population. Although the mating success of a subordinate male in a coalition appears to be extremely low, his chances of achieving membership in a bisexual troop as a single male may be even lower. Since the majority of troops in the population during any given year were multi-male or age-graded male (85%–96%), the number of troops that a single male would be able to invade unaided was very small. A subordinate male may be able to assume dominance, particularly if he is a subadult. In coalitions in which males are related, the subordinate male will further benefit from inclusive fitness. A dominant male that forms a coalition with a relative can expect to have longer reproductive tenure than in a troop with a non-relative, thereby producing more offspring and directly enhancing his fitness. Anecdotal evidence suggests that males choose relatives over non-relatives as coalition partners when possible.     

Uniformity versus differentiation in regulating externalities

In the regulation of pollutant emissions, a regulator may treat different sources (with different costs and environmental damage) as though they were the same—for institutional, informational, or transaction cost reasons. This may occur despite the efficiency gains from regulatory differentiation of sources. This issue has been a source of much controversy in the environmental economics literature and is examined here from a theoretical perspective. Using a two pollutant economy, emissions and net social benefits are compared for the case of efficient, differentiated regulation and the case of uniform, undifferentiated regulation of the aggregate of the two pollutants. We show when aggregate emissions will be greater than, equal to, or less than efficient emissions and we derive conditions for each of these three possibilities. Further, we show that when marginal costs and benefits become more steeply sloped, the inefficiency associated with undifferentiated regulation increases.     

Heterogeneous firms and the environment: a cap-and-trade program

Currently, cap-and-trade programs are a cornerstone of many countries' climate change policies and proposals. This paper investigates the economic and environmental effects of different climate change policy designs in a general equilibrium setting with heterogeneous firms and monopolistic competition. The analysis predicts that the cap on emissions perfectly defines the environmental quality but has no effect on firms' profits, or decisions to enter or exit the market. In contrast, increasing the share of free allocations of emission allowances, as opposed to auctions, has no effect on environmental quality but reallocates resources among firms toward the most productive ones which has an impact on firms' entry and exit decisions, the mass of firms, and the composition of the market. Firm heterogeneity magnifies these economic effects of changes in the initial allocation of allowances. The paper provides a decomposition of the change in aggregate emissions which takes account of the changes at sector level, across the firms within a sector, and at the firm level.     

Analyzing the effectiveness of international environmental policies: The case of the Kyoto Protocol

We study the effectiveness of emission targets under the Kyoto Protocol with respect to reducing CO₂ emissions. Using country-level and US state-level panel data and employing the synthetic control method, we find very little evidence for an emission reduction effect for the major emitters among the Annex B countries with binding emission targets. More generally, we also show that evaluating the effectiveness of international environmental policies at the country level comes with a number of empirical challenges that may invalidate findings based on more traditional panel data approaches.     

Plant vintages, grandfathering, and environmental policy

Environmental regulations that grandfather existing plants, by not holding them to the same strict standards as new plants, may have the unintended consequence of retarding new investment. If new plants are cleaner, then this effect may increase pollution in the short run. I develop a dynamic model of a facility’s decisions over scrapping and abatement, which depend on capital depreciation, profitability shocks, and environmental policy. Using data from fossil fuel fired boilers at electric power plants, I estimate the structural parameters of the model and assess the impact of grandfathering in the Clean Air Act on sulfur dioxide emissions. Counterfactual policy simulations show that an increase in the stringency of performance standards would have led to a decrease in investment in new boilers. However, this does not lead to increased emissions, since there is less investment in dirtier coal boilers as compared to relatively cleaner oil or natural gas boilers.     

Bargaining over natural resources: Governments between environmental organizations and extraction firms

We consider the resource-extraction policy of a government that is lobbied by an environmental organization and an extraction firm from foreign countries. To analyze this situation, we propose a sequential Nash bargaining solution: The government bargains with both lobbies simultaneously. Should this trilateral negotiation fail, it chooses one lobby for a bilateral negotiation. The disagreement point then is to bargain with the other lobby. Finally, should this second bilateral negotiation break down, the government chooses the welfare-maximizing policy.As long as cumulative extraction is low, such that stock-dependent extraction costs are also low and extraction profits are high, the environmental organization has a weak bargaining position, but it takes influence to reduce extraction. Once that cumulative extraction has increased so much that extraction profits are below a threshold, the bargaining positions change, and the environmental organization gets compensated by the extraction firm for not letting the trilateral negotiation fail.     

Do voluntary international environmental agreements work?

We consider the effects of international environmental agreements using the 1988 Sofia Protocol on the reduction of nitrogen oxides. Panel data on 23 European countries for the period 1985–96 is used to evaluate the impact on emissions by dividing countries into participants and non-participants: that is, those that did and those that did not ratify the Sofia Protocol. Using a difference in difference estimator and controlling for country-specific variables, we find that signing the treaty had a significant positive impact on emission reduction. The estimated yearly reduction in emissions is approximately 2.1% greater than it would have been without the Sofia Protocol.