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Repeated games may help climate change negotiations

November 22, 2016 Leave a comment

Reading a post from Michael Cameron’s blog reminded me of how repeated games of the prisoner’s dilemma may help climate change negotiations.

The Paris Agreement came in to effect on 4th November this year and it brings all nations into a common cause to undertake take ambitious efforts to combat climate change and adapt to its effects, with enhanced support to assist developing countries to do so.

The main issue with tackling climate change is the cost to countries of implementing it. To be successful it will need profound transformation of energy and transport organisations, and changes in the behaviours of billions of consumers. Research has suggested that it will likely cost 1% of GDP – even though it doesn’t seem much, it is double the amount currently spent on development aid worldwide.

A successor treaty? 

According to Michael Liebreich, the prospects don’t look good when you consider the following:

  • The US sees a cap on carbon emissions as a threat to competitiveness, and hence to its global supremacy. Add to this the rhetoric of President elect Donald Trump which has dismissed global warming.
  • The developing world denounces any calls for a cap on emissions as an effort by former colonial powers to hold back development;
  • Europe has been making encouraging though patchy progress towards targets, driven mainly by a one-off switch from coal to gas.

The issue here is how countries can expect to make cuts in emissions when their economic competitors refuse. This in turn leads to The Tragedy of the Commons which occurs when a group’s individual incentive lead them to take actions which, overall, lead to negative consequences for all group members.

Climate Change as Prisoner’s Dilemma
The initial impression from the discussions over climate change is that of a typical Prisoner’s Dilemma. As mentioned previously, the cost of tackling climate change is approximately 1% of annual per capita GDP. However, if nothing is done about the issue the cost is estimated to be between 5% to 20% of GDP. So that defines what happens at the extreme of cooperative or non-cooperative behaviour.

Climate Change - Pris Dil

Form the table above, a country that refuses to act, whilst the other cooperates, will experience a free-rider benefit – enjoying the advantage of limited climate change without the cost. On the flip side, any country that imposes limits, when its competitors do not, incurs not just the cost of limiting its own emissions, but also a further cost in terms of reduced competitiveness – estimated here at an additional 3.0%.

From the table it seems predictable that countries should prefer to be self-interested: the best national policy, if others reduce emissions, is to defect; likewise, if other countries are not taking action, then it is pointless to be the only sucker to take action, and one should again defect.

Repeated Prisoner’s Dilemma and Cooperation 

The dynamics of the prisoner’s dilemma do change if participants know that they will be playing the game more than once. In 1984 an American political scientist at the University of Michigan, Robert Axelrod, argued that if you play the game repeatedly you are likely to see emerging is cooperative rather than defective actions. He identified four elements to a successful strategy which is this case can be applied to climate negotiations:

1  Be Nice – sign up to unilateral cuts in emissions, as deep as your economy and financing capacity allows.

2  Be Retaliatory – single out countries that have not commenced action and, in collaboration, find ways of pressurising them until they do so.

3  Be Forgiving – when non-compliant countries come onboard give them generous applause; signal that good behaviour
will be rewarded with even deeper cuts in your own emissions.

4 Be Clear – let everyone know in advance exactly how you are going to behave – that you will work with them if they take action on emissions, and that you will retaliate if they do not.

It is the belief of Michael Liebreich that this research by Axelrod should be put into practice by the world’s climate negotiators. As treaties on climate change are on-going and therefore become part of the game.

Final thought 

Repeated Prisoner’s Dilemma provides valuable insight into how countries should act away from the negotiating table and over the longer term. This analysis also highlights the fact that the negotiations themselves are not the game. Diplomats and politicians don’t reduce emissions, engineers and consumers do. However, there are errors in the resemblance as governments can form alliances, which makes the dynamics of the game a great deal more complex. Furthermore, they can act inconsistently and irrationally, and their willingness to act is most probably associated with the harshness of global warming. Ultimately, for the planet’s sake, one hopes that everyone will play the game.

Sources: 

  • The Economist – Economics Focus: Playing with the planet. 29th September 2007 
  • New Energy Finance – How to Save the Planet – Michael Liebreich– 11th September 2007 
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Weaning countries off coal won’t be easy.

September 5, 2016 Leave a comment

Coal UsageGermany, the greenest of green countries, and probably the world’s most enthusiastic investor in renewable energy, is finding it very hard to breakaway from coal fired plants. The German government were all set to impose a levy on the coal industry but instead gave a subsidy of 1.6 billion euros to mothball eight coal-fired plants and shut them down permanently by 2023. The main cause of this change of policy was that there was significant pressure from labour unions and local governments in the coal industry. The resistance in the greenest of green countries is indicative of workers and retirees, local economies and communities still depend on coal.

So from Germany to India, strategies to increase the share of renewable energy in the power mix have relied on a coal base. Although governments worldwide are focused on cleaning up energy sources that cause significant emissions, there needs to be some regard for displaced workers from traditional energy sources like the coal industry. Coal miners skills will hardly be transferable to other occupations – structural unemployment.

Nevertheless, coal remains one of the easiest and cheapest form of energy and this is very apparent in India where usage is about 62% of energy needs. India is the second largest consumer after China and ahead of the USA. Also coal consumption is growing about 7 percent a year to power the country’s economic catch-up. As China is going through a growth period similar to Europe many years earlier, their argument will be that European countries polluted the environment by a similar amount

Climate change activists have highlighted concerns of rising temperatures by 2100, however  are rising temperatures as significant when you consider the long-term implications of much higher unemployment?

Source: New York Times – 30th August 2016

Climate Change and Economic Growth

November 20, 2015 Leave a comment

There has been research to suggest that climatic conditions can have a significant effect on economic growth although they tend to be inconsistent. A paper published by the journal Nature suspects that researchers in the past have been looking at the directly relationship between temperature and economic growth. In this paper they approached the research looking for an optimal temperature, on the assumption that both extreme cold and extreme heat can harm growth. Researchers found that:

Hotter-than-usual years benefit countries, rich and poor alike, up to an average annual temperature of 13°C, after which hotter weather begins to reduce growth.

This data allowed them to deduce the likely effect of climate change – see chart.

GDP v Temperature

Brazil – an increase in temperature of 3°C (from 22°C to 25°C) = GDP 3% down

Germany – an increase in temperature of 4°C (from 9°C to 13°C) = GDP 1% up

As countries like Germany and France are on the colder side of the optimum (13°C) they tend to grow faster in hotter years in contrast to the USA and Australian whose normal temperature is the hotter side of 13°C. Some economists have argued that with global temperatures changing there is no firm baseline for comparison. However in the primary sector the growing of agricultural produce is most productive at particular temperatures. In the US those involved in jobs such as  construction and manufacturing tend to leave work an hour earlier when the temperature rose above 29°C. Therefore in order to maintain the hours worked either more people have to be employed or employees are paid extra. It is estimated that 28% of the US workforce are exposed to the weather so this may mean higher costs for businesses.

Sea-level rising

Global warming also means that the sea-level will rise and countries and cities face the decision as to whether to build costly flood defences or accept the consequences. Moreover, even if rich countries manage to fend off the worst effects of global warming, they will still feel its repercussions. Trade with more vulnerable places would decline; refugees would proliferate.

Final thought

If the global economy continues to function in a smilier vein to the recent past. climate change is expected to reshape the global economy by substantially reducing output and amplifying inequalities relative to a world without climate change. Innovation or defensive investments might reduce these effects but social conflict or disrupted trade – either from political restrictions or correlated losses around the world – could worsen them.

Sources:

Nature- Global non-linear effect of temperature on economic production – 15th September 2015

The Economist  – Putting Goldilocks to work – 24th October 2015

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El Niño and Commodity Prices

September 25, 2015 Leave a comment

Below is a very good video from The Economist outlining the effects of the El Niño weather pattern. It was first called El Niño – the boy (Jesus) – by Peruvian fisherman over a century ago because it became noticeable at Christmas time.

In parts of south east Asia, southern Africa and Australia it produces drier-than-average weather and even droughts. Research has shown that El nino tend to reduce global cocoa production by 2.4% which can lead to a price rise of almost 2%.

In South America heavy rain could threaten zinc, nickel and copper supply. Drought in South East Asia could lead to power shortages and higher prices in those countries that rely on hydropower.

Cash on Delivery – a better approach to aid.

June 11, 2015 Leave a comment

Aid RemitForeign aid programmes have been criticised for encouraging dependency and wastefulness amongst developing countries. All too often there is little to show for the spending that has eventuated in these countries. Furthermore there seems to be a mismatch between what donors are prepared to pay for and what recipient countries feel is a priority. Money, in a lot of circumstances, is given to firms who have close links with the government but the end product is not used e.g. schools, roads and other infrastructure. Although donors can be stringent at how the money is spent, it is very difficult to monitor commercial activities in the developing world. For example “The Economist” reported that laying a square meter of road costs the World Bank 50% more in countries where firms report paying bribes above 2% of the value of contracts than ones where such payments are reported to be lower.

In order to combat this donors are now looking at giving aid only if outcomes improve – “Cash on Delivery”. Under this system recipients decide what they would like to develop in their economy and starts to use its own money and existing aid. This has also been referred to as the Stick and Carrot approach.

Coarse Theorem – Ronald Coarse argued that bargaining between parties could produce a mutually beneficial and efficient solution to problems like pollution.

Norway and Liberia
An example of this was the a deal between Liberia and Norway. Norway will give $150m in aid in return for Liberia stopping the destruction of its forests. The stick approach of trying to force Liberia to stop cutting down its trees might give way to a more effective carrot approach by paying Liberia to do so. This makes both sides better off. Liberia still gets the aid and Norway gets to preserve biodiversity and take a small step against climate change.

UK and Ethiopia
The UK has agreed to pay Ethiopia up to US$157 for each extra pupil sitting its school-leaving exam, compared with numbers before then, and another US$157 for each pupil who passed. Two years later nearly 45,000 extra students have taken the exam and 42,000 extra have passed.

I suppose now the onus is on the recipient country to avoid failing which has been the case with some conventional aid programmes where it is easy to proclaim assets as accomplishment.

Norway and Liberia – Coase Theorem

October 28, 2014 Leave a comment

Climate tradeA recent article in the New Yorker by James Surowiecki addressed the issue of Coase Theorem – Ronald Coase argued that bargaining between parties could produce a mutually beneficial and efficient solution to problems like pollution. An example of this was the a deal between Liberia and Norway.

Norway will give $150m in aid in return for Liberia stopping the destruction of its forests. See cartoon from the New Yorker.

Stick and Carrot

The stick approach of trying to force Liberia to stop cutting down its trees might give way to a more effective carrot approach by paying Liberia to do so. This makes both sides better off. Liberia still gets the aid and Norway gets to preserve biodiversity and take a small step against climate change.

5 or 6 more China’s

The reality is that the planet can’t stand another 5 or 6 China’s but developing countries still need to grow and, like their developed country counterparts, it will involve greenhouse gas emissions. If we are to curb global emissions developing countries will have to leapfrog to new technologies as the burning of traditional fossil fuels will just exacerbate the problem. However developing countries have neither the resources nor the incentive to reduce dependence on fossil fuels on their own as their main focus is economic growth. Whilst developed countries have a lot to lose from developing-world emissions it is in their interest to pay the latter to curb emissions e.g. Norway paying Liberia not to chop down its trees. Although this looks a simple enough policy politicians will not be so enthused by it as money that is paid overseas to cut climate change is not very popular with the electorate and therefore the government.

Demand↑ and Supply↓ = Food Prices↑

February 6, 2011 Leave a comment

Paul Krugman has simplified the recent increase in global food prices. On his blog he had the following graph which shows the % declines in grain production.

Demand Pressures

With the exceptional growth in China and a change in diet, there is more pressure on imports of food. The US Grains Council, which in October pegged China’s 2011 corn imports at 2m-3m tonnes, said that the figure could reach 3m-9m. However, as Krugman, points out the demand for grain is highly inelastic. For the United States, they put the price elasticity of demand for breads and cereals at 0.04 — that is, it would take a 25 percent rise in price to induce a 1 percent fall in consumption.

Supply Pressures
Most of the decline in world wheat production, and about half of the total decline in grain production, has taken place in the former Soviet Union — mainly Russia, Ukraine, and Kazakhstan. As you may know this was due to unique heatwave that was prevalent in the area. I blogged on this on 5th September last year – Wheat Prices – what’s driving them up? And it’s not just the FSU (Former Soviet Union): extreme weather elsewhere has played a role in bad harvest around the world.

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