Game Theory and Climate Change
Climate Change is upon us, and Humanity is not doing enough to counter the adverse effects. These effects include: rising sea level, rising temperatures (of the land, ocean, and atmosphere), ocean acidification, melting glaciers, increased incidence and severity of floods and droughts (depending on location), increased occurrences and magnitude of forest fires, desertification, decreased agricultural productivity, decreased labor in the summer, and civil/international unrest due to decreasing security. These issues are caused by the emissions of greenhouse gases - gases that trap infrared radiation and warm the planet. Examples of greenhouse gases include Carbon Dioxide, Methane, Nitrous Dioxide, and tropospheric ozone (ozone located in the troposphere due to human activities). The international scientific community has gotten together with 99% certainty via the UN sponsored Intergovernmental Panel on Climate Change. Game theory can explain why the international community has not done enough to mitigate the effects of climate change.
In this game, there are two players: the developed countries and the developing countries.
As the two players are operating under anarchical conditions, each side is unrestricted in greenhouse gas emissions and do not know what the other player is going to do. There are short term economic benefits (despite the long term effects of climate change highlighted above) to emitting greenhouse gases. As a result, there is a “business as usual” scenario where the developed countries keep emitting and the developing countries are worse off. This is one of the inefficient outcomes. There is an opposite scenario of the “business as usual” scenario, where the developing countries emit and the developed countries forgo their emissions. This scenario is also inefficient as the developing countries are now better off in the short run and the developed countries are now relatively worse off. The last two scenarios are the efficient outcomes where either both countries emit the greenhouse gases, or where both countries abate their greenhouse gas emissions. The latter is the “worst-case” scenario as both players cause the effects of climate change and accelerate it. The former is the “best-case” scenario or the nash equilibrium as both countries become relatively worse off in the short-run to become much better off in the long run. Currently, we are at the point where the developed countries are emitting much more than the developing countries. It is also important to point out that the developed countries are much richer and have significantly higher GDPs due to their historic emissions of greenhouse gases. This makes them better able to respond to the effects of climate change than the developing countries.
So, why haven’t we reached the nash equilibrium? Third parties have an international and economic stake in this issue. The fossil fuel industry has a prevalent hand in many of the governments of the developed countries. The industry bought out many of the decision makers in these developed countries in order to prevent costly regulation of the industry that reduces the profit margins. The environmental interest groups are weak in comparison to the fossil fuel industry lobby as they lack resources. Another reason of why the developed countries have not been able to reduce their emissions is because of socialization. The economies of the developed countries are intertwined via trade. As regulations of one developed country raise the operating cost of the industry, firms in the industry will relocate to where the regulations are weakest. Thus, trade makes the economy worse off as firms can leave countries that don’t regulate their markets. The last reason that the nash equilibrium was not reached was due to the failed institutions of the UN. These institutions are the Kyoto Protocol and the Warsaw Climate Summit. These meetings had weak enforcement of rules and regulations for each country involved. Incentives for developed countries to stick to the agreement were nonexistent. At warsaw, the developed countries walked out due to the influence of the third parties. Because of third parties, socialization, and failed institutions, the developed and developing countries have not reached the nash equilibrium. Hopefully, although I am not optimistic, things will change next year in Paris.
As the two players are operating under anarchical conditions, each side is unrestricted in greenhouse gas emissions and do not know what the other player is going to do. There are short term economic benefits (despite the long term effects of climate change highlighted above) to emitting greenhouse gases. As a result, there is a “business as usual” scenario where the developed countries keep emitting and the developing countries are worse off. This is one of the inefficient outcomes. There is an opposite scenario of the “business as usual” scenario, where the developing countries emit and the developed countries forgo their emissions. This scenario is also inefficient as the developing countries are now better off in the short run and the developed countries are now relatively worse off. The last two scenarios are the efficient outcomes where either both countries emit the greenhouse gases, or where both countries abate their greenhouse gas emissions. The latter is the “worst-case” scenario as both players cause the effects of climate change and accelerate it. The former is the “best-case” scenario or the nash equilibrium as both countries become relatively worse off in the short-run to become much better off in the long run. Currently, we are at the point where the developed countries are emitting much more than the developing countries. It is also important to point out that the developed countries are much richer and have significantly higher GDPs due to their historic emissions of greenhouse gases. This makes them better able to respond to the effects of climate change than the developing countries.
Ryan:
ReplyDeleteGood post. I thought it was cool how you related climate change to game theory in this way. I completely agree that this is an issue that must be resolved. Out of all the reasons you pointed to for a Nash equilibrium not being reached I mostly agree with the socialization point. Developing countries do not have the luxury of negotiation when it comes to climate change because tightening up regulations means economic loss. Quite frankly, I do not think that will ever change from the developing country perspective, but rather, it will have to come from citizens of developed nations pressuring tighter regulations everywhere. On the other hand, I think it is an unfair statement to regard institutions as "failed" when it comes to climate change. Climate change is a subject that is still being learned about and I think it is hard for institutions to help nature by cooperating with man. As i say this, I cannot say that I have any suggestions but institutions can only do so much. You gave the example of Kyoto and Warsaw which completely fell apart, however, I do not think incentives would have helped even if they existed. Capitalistic mindsets control where climate change is headed.
When you look at how developed countries rose you find that industry and output are key. Currently developed countries came up on coal and oil fueled industries. As you say, we have been socialized to use fossil fuels. Interestingly, developing countries are funneling more resources into renewable energy. Kenya, for example, is the leader per capita in solar panels. It will be interesting to see what renewable energy can be made to do for developing countries and if developed countries will begin pushing more towards renewable energy.
ReplyDeleteJohn: Thanks. I agree with you that citizens of developed countries will need to put pressure on the government to initiate stronger regulations. However, there are many challenges with this approach. Even though there is a 99% scientific consensus on climate change, there is only a 45% public consensus. Also, President Obama used an executive order to regulate coal-fired power plants on carbon emissions using the Clean Air Act. His executive action is in the process of lengthy legal proceedings. Also, with a government controlled by the Republicans, hired by the fossil fuel industry to disregard all scientific evidence on climate change, progress will only go in the direction that we don't want it to go in. I disagree with you about the failed institutions. The Kyoto Protocol and the Warsaw Summit did not succeed to produce the desired results on climate change mitigation. The reasons that these institutions failed was because of socialization and third parties (the fossil fuel industry lobby).
ReplyDeleteMatt: Yes there is alot of renewable energy development in Africa, but this is also a problem. Spain and Germany have connected to those grids to gain the solar power from the North African countries. This is arguably neo-colonialism as this is the same as imperialism via the market. The developing countries bear the costs of the renewable energy investments, while the developed countries steal the jobs and the energy. As the energy is transferred from one country to another, some of it is converted to heat and lost to space. Also, the developing countries have an energy crisis of their own. They have a very finite supply of fuel wood. They are harvesting and burning this wood at an unsustainable rate. This causes erosion of the land, habitat losses, and more carbon dioxide emissions. Kenya has successfully countered this problem due to the work of Dr. Wangari Maathai, one of the first women in Kenya to have a PHD and one of the world's first human rights activists to win a Nobel peace prize for environmental awareness. She lead a grassroots movement that encouraged the citizens of Kenya (primarily women) to plant more trees to have more resources to increase the standard of living. Her programs worked, and this is on of the reasons why Kenya is now a leader with solar panels. As much as I would like to see a future filled with green energy, for now we are stuck with fossil fuels due to the global political situation.
http://www.motherjones.com/environment/2014/11/obama-just-announced-historic-climate-deal-china
ReplyDeleteYesterday, after this post was written, Obama struck a deal with Xi Jinping to cut carbon emissions. Game theory could also explain this. The developed countries see the urgency of reaching the nash equilibrium so they have to take dramatic actions to get there. I am more optimistic as the two countries will be leading the changes that we need to see and other countries may join in. However, I am more pessimistic as these changes may be nullified by the Republican party in Congress due to the influence of corporate campaign expenditures.
Note: I also made a mistake in this post when I wrote in a rush. I said "Thus, trade makes the economy worse off as firms can leave countries that don’t regulate their markets". My correction to this statement is: "Thus, trade makes the economy worse off as firms can leave countries that regulate their markets".
I adore economic principles especially when they are applied to fields that people typically don't think of as able to be explained by them. I look for those explanations in the media, usually with great futility. So it is with joy that I read your post!
ReplyDeleteI agree with all of your analysis. However, to play devil's advocate, I ask you to consider the following hypothetical. Economics is about maximizing net gain. Is there a net gain derived from going all-out on practices that, though they may be beneficial in the short term, have a cumulative long-term impact in any scenario, not just greenhouse gases? Much emphasis is placed on trying to focus on the long-term, but are those exhortations backed up by economic proof?
You describe this PD as having two players: developed and developing countries. (Thanks for not using "Third World.") But you go on to talk about third-parties, or companies with a short-term interest in maintaining the practices that contribute to climate change (CC). You also talk about how one country increasing regulations could lead to firms leaving for another country. Might it make sense to talk about this PD with each country as an equal, or at least amongst it's own group, i.e. developed/developing?