Game Theory in the Economics of Climate Change

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  • Topic: Game theory, Prisoner's dilemma, Nash equilibrium
  • Pages : 10 (3370 words )
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  • Published : October 17, 2010
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‘How useful is game theory in analysing the deadlocks and progressions over the economics of climate change policy at the recent Copenhagen summit ?’

A secondary data and literature review based project

October 2010

Mark Burke


Aims and Methodology

This project seeks to analyse how useful Game Theory is in explaining the decisions ( or lack thereof ! ) on economic policy taken by governments at the recent Copenhagen summit on climate change ( 6th – 18th December 2009 ). Starting with the classical Prisoners Dilemma, can Game Theory explain why the players defected against each other ( i.e. cooperation did not happen at Copenhagen ) when most ‘rational’ agents would have expected co-operation ? ( self interested meaning being capable of seeing long term consequences as well as short term gain ! ) This paper will consider how far the nuances of game theory can convincingly explain the ‘result’ of the Copenhagen summit. Can ‘free riding’, the ‘tragedy of the commons’ and ‘co-ordination failures’ explain the lack of progress at the 2009 Copenhagen negotiations on climate change ? On the other hand, can the ‘Nash equilibrium’, ‘assurance games’ and ‘ultimatum games’ aid our understanding of what progress has been made on climate change policy at the Copenhagen summit ? Many papers appear to have correctly predicted the failure of the Copenhagen summit to achieve legally binding targets on carbon emissions. More-so, they often convincingly explain why the negotiations would fail, e.g Bruce de Mesquita’s article in ‘Foreign Policy’ magazine ( November 2009 ) . Thus it seems Game theory may have much validity in explaining how the negotiations played out at Copenhagen.

This project will consider classical texts on Game theory, recent working papers on Game theory and it’s application to environmental policy, and the recent events at Copenhagen. It will also depend to some extent on journalists’ accounts who were privy to exclusive negotiations, and online articles and blogs given the contemporary nature of the subject. Ultimately the aim of the project will be to create a plausible explanation of the results of the Copenhagen summit in the context of Game Theory, and thus make some judgement on the usefulness of Game Theory with regards to climate change negotiations. We may even draw some tentative conclusions about Game Theory and it’s ability to both predict and aid future climate change negotiations.


Arguably climate change negotiations can be seen as an attempt to overcome the ‘ tragedy of the commons and free-riding’ i.e the situation where the pursuit of personal gain will ultimately end in disaster for all. Unable to trust each other and co-operate, nations will continue with the current model of economic growth and yet thus contribute to the ultimate demise of their standard of living. The dilemma has arisen arguably because of two main conditions ; i) with current technology, limiting carbon emissions will lead to potential loss of short to medium term economic growth ( something nobody seems to view as acceptable ), and ii) there is still enough scepticism about the science of climate change ( especially with the leaked email IPCC controversy ) so as to create a situation where the threat of ‘prison’ is not plausible. There is thus no incentive for ‘sceptics’ to avoid ‘prison’. The Copenhagen summit was widely regarded as a failure, with the UN promising only to ‘ take note’ of the work done by Ad-Hoc Working Groups. The Copenhagen Accord sets up more talks in 2012 but does not in itself offer any new legally binding resolutions that will impact on carbon emissions. However, a commitment has been made to establish a fund that will provide 100 billion US dollars a year by 2020 to aid developing countries with the challenges of climate change. Given the scale of current international aid, 100 billion globally is a modest amount and one can understand...
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