Book Chapter
CO2 and the Greenhouse Effect

A Game-Theoretic Exploration

This chapter uses game theoretic models to examine scope for international cooperation for reducing CO2 emissions. Though the collective benefits of reduced emissions may be significant, it is in no country's self-interest to make significant sacrifices through a reduction in emissions. In the absence of cooperation, the total quantity of emissions will be in excess of the social optimum, that allocation of emissions which maximizes the total income of all countries minus the environmental costs. However, not all kinds of international agreements lead to a social optimum. A more common type of agreement is one where all countries are required to make uniform percentage reduction in emissions. The cost difference between these two types of agreements may be quite large. This chapter explores two other types of environmental agreements, namely, an international CO2 tax and tradable CO2 permits. Disregarding the size of a country, it is seen that both of these systems are equivalent. With a CO2 tax, setting the tax level can be an issue and it may take a few iterations to reach the desired level of tax.