The Kyoto Protocol: An Economic and Game Theoretic Interpretation

Abstract

Using both positive and normative economics, we examine the issues at stake in the current international negotiations on climatic change. After reviewing the main features of the Protocol, an elementary economic model serves to identify the main concepts involved: optimality, noncooperation, coalitional stability. Alternative concepts are reviewed that characterize the noncooperative equilibrium before the negotiations. Data suggest that the prevailing situation is a mixed one. Turning to the Protocol, we claim that the emission quotas are only a step in the direction of optimality; that for achieving these quotas, trading ensures efficiency, as well as coalitional stability, if it is competitive and adopted at the largest scale. Beyond, we show that worldwide coalitionally stable optimality is a real possibility with quotas and trading, subject to future agreement on appropriate reference emission levels, especially for developing countries.