CORE DISCUSSION PAPER 9925 THE KYOTO PROTOCOL: AN ECONOMIC AND GAME THEORETIC INTERPRETATION Parkash CHANDER1 Henry TULKENS2 Jean-Pascal VAN YPERSELE3 and Stephane WILLEMS4 May 1999 1 e Indian Statistical Institute (ISI), New Delhi and CORE, Universit´ Catholique de Louvain, Belgium. This author’s work in Belgium was ﬁnanced by the CLIMNEG pro- gram. 2 e CORE, Universit´ Catholique de Louvain, Belgium. E-mail: email@example.com 3 e ıtre e Institut d’Astronomie et de G´ophysique Georges Lemaˆ (ASTR), Universit´ Cath- olique de Louvain, Belgium. 4 e e e Task Force D´veloppement Durable (TFDD), Bureau f´d´ral du Plan, Brussels. The authors are especially indebted to their MIT colleague Denny Ellerman who kindly informed them of the state of his work and provided key numerical information. They also thank their colleague Jean Gabszewicz for a careful reading of an earlier version. The research on which it is reported here is part of the program “Changements climatiques, e e N´gociations internationales et Strat´gies de la Belgique” (CLIMNEG), supported by the e e Belgian State’s Services du Premier Ministre, Services f´d´raux des Aﬀaires scientiﬁques, techniques et culturelles (SSTC), Brussels. This paper presents research results of the Belgian Program on Interuniversity Poles of Attraction initiated by the Belgian State, Prime Minister’s Oﬃce, Science Policy Pro- gramming. The scientiﬁc responsibility is assumed by the authors. Abstract Calling upon both positive and normative economics, we attempt to characterize the issues at stake in the current international negoti- ations on climatic change. We begin (Section 2) by reviewing the main features of the Protocol. Then (Section 3), we identify by means of an elementary economic model the main concepts involved: optimality, non cooperation, co- alitional stability. We observe (Section 4) that “business-as-usual”, “no regrets” and other domestic policies are alternative ways to con- ceive of the non cooperative equilibrium prevailing before the negoti- ations. Which one should be retained? Data suggest that the prevailing situation is a mixed one, exhibiting characteristics of several of these policies. We then turn (Section 5) to interpreting the Protocol. While there is no ﬁrm basis to assert that the emission quotas chosen at Kyoto correspond to optimal emissions (although they are a step in the right direction), economic and game theoretical arguments are put forward to support the view that for achieving these emission quotas, trad- ing ensures eﬃciency, as well as coalitional stability for the agreement provided it is adopted at the largest scale i.e. worldwide. Finally, it is argued in Section 6 that beyond the Kyoto Protocol, the achievement of coalitionally stable optimality at the world level is a real possibility with trading, provided agreement can be reached in the future as to appropriate reference emission levels, in particular as far as developing countries are concerned.
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