The WSPC Reference on Natural Resources and Environmental Policy in the Era of Global Change

The following sections are included:

• Foreword
• Contributing Authors
• Introduction
• Contents

Game Theory has been applied to fisheries for over 30 years. For internationally shared stocks, these applications have focused primarily on the need for cooperative management between fishing states to promote effective governance. Non-cooperation, however, has been the norm in shared stocks management, with the prisoner’s dilemma emerging time and again, resulting in over-capacity and overfishing. In this chapter, we describe the history of global fisheries as a prisoner’s dilemma, and review how cooperative Game Theory has been applied. We argue that the cooperative applications, however, are inadequate in fully elucidating how benefits from cooperation could be achieved, specifically by ignoring the problems of moral hazard and adverse selection. Both of these are related to information asymmetries and both challenge the governing authority and power of Regional Fisheries Management Organizations (RFMOs). Using the lens of principal–agent theory, we speculate on the potential for particular tools, such as catch shares, high seas closures, taxes and logbooks, to help strengthen RFMOs by overcoming these principal–agent problems. The case of tuna in the Western and Central Pacific Ocean (WCPO) is used to demonstrate the potential application of this approach.

This chapter reviews recent developments in the literature on the exploitation of a renewable resource by an oligopoly. We review how to successfully design more conservative unilateral policies that aim to increase the common resource stock. We show how increasing the reproduction rate of the resource, for example through research and development policies may be counterproductive and exacerbate the tragedy of the common. We discuss the specificity of antitrust and competition policy in the context of a resource oligopoly: there could be larger incentives to merge or collude than in a standard Cournot oligopoly setup. Antitrust authorities must therefore be more vigilant in the case of resource industries. Other policy implications such as the design of property rights or free trade are also reviewed.

We couple a spatially homogeneous energy balance climate model (EBCM) with an economic growth model which incorporates two potential policies against climate change: mitigation, which is the traditional policy, and geoengineering. We analyze the optimal policy mix of geoengineering and mitigation in both a cooperative and a non-cooperative framework, in which we study open-loop and feedback solutions. Our results suggest that greenhouse gas accumulation is relatively higher when geoengineering policies are undertaken, and that at non-cooperative solutions incentives for geoengineering are relatively stronger. A disruption of geoengineering efforts at a steady state will cause an upward jump in global temperature.

In this chapter, we explore the use of trade policy in addressing trans-boundary stock pollution problems such as acid rain and water pollution. We analyze a stark model where the pollutant is generated by production of a good that is exported from the polluting country to an importing country that is damaged by the pollutant. While the importing country can not impose an effluent tax on polluters, it can indirectly force polluters to bear some of the external costs, by imposing a tariff on the product. In this modeling context, we describe the manner in which the (second-best) tariff-cum-effluent tax relates to the stock of the pollutant.

Non-point source (NPS) pollution is a major source of water quality impairment in many countries. Controlling NPS pollution is particularly challenging because of its diffuse and stochastic nature. The economic literature on NPS pollution focuses on domestic contexts, where the polluters are within a given country. However, NPS pollution can be important in international contexts as well. This chapter examines the extent to which the economic literature on NPS pollution, with its focus on domestic pollution, can be applied in an international context. The main conclusion is that ambient-based policies designed to addressed NPS pollution can, at least in theory, be effective not only at the domestic level but also at the international level, provided a supranational authority exists. When such an authority does not exist, countries would have an incentive to create one, if a mechanism exists for sharing the resulting welfare gains. If instead the focus is on developing an international agreement that countries could choose to sign or not, then the prospects for efficiently reducing international NPS pollution are less encouraging.

The process of globalization has shaped and has been shaped by firms and nongovernmental organizations (NGOs), many of which have become multinational corporations and international NGOs, respectively. The global setting and its challenges led NGOs to innovative strategic approaches in their interactions with governments and firms, for which Game Theory is a natural analysis tool. Based on the game theoretic research of NGOs we identify four major roles played by them in these interactions that range from confrontation to cooperation: lobbyists, mobilizers, litigators and information providers. In addition we highlight a mechanism that led some of the national NGOs to become international NGOs. In light of the surveyed literature we have to take a nuanced view regarding NGOs’ impact on welfare as it can be positive or negative despite NGO entrepreneurs’ drive to have a strictly positive impact in society. Therefore policy implications such as encouraging the proliferation or limiting the number of NGOs are best addressed within each specific setting.

This chapter offers an overview of the literature discussing oligopoly games in which polluting emissions are generated by the supply of goods requiring a natural resource as an input. An analytical summary of the main features of the interplay between pollution and resource extraction is then given using a differential game based on the Cournot oligopoly model, in which (i) the bearings on resource preservation of Pigouvian tax rate tailored on emissions are singled out and (ii) the issue of the optimal number of firms in the commons is also addressed.

This chapter offers a simple North–South deforestation model in order to analyze the effectiveness of the REDD+ mechanism. We study two institutional scenarios consistent with REDD+, a first one where the North decides upon the funding before the UN settles the baselines (Stackelberg design), and a second one where the North and the UN make simultaneous decisions (Nash design). Our results suggest that in some situations the Stackerlberg option is the worst design, characterized by the poorest performances in terms of funding and social welfare.

We study recent contributions of the literature on the impact of environmental policies in the context of general equilibrium models with endogenous growth. We present a general (innovation-based) endogenous growth model in which the use of non-renewable resources (fossil fuels) causes environmental damages. An alternative resource, renewable and non-polluting, is also available, with dedicated knowledge and specific research and development (R&D) sector. Furthermore, a carbon capture and storage (CCS) technology exists; it is possible, through dedicated efforts, to reduce the emissions associated with a given flow of resource use.

The Porter Hypothesis suggests that some environmental policies may simultaneously benefit the environment and domestic competitiveness. We review the theoretical arguments to support this hypothesis paying special attention to the strategic and international trade aspects. We consider scarcity rents, strategic trade, technological externalities, quality competition and information incompleteness. We conclude that, under some conditions, environmental regulation can result in economic benefits even if some of the conditions set by Porter and van der Linde fail to hold. This result may arise because those opportunities were not present or could not be exploited before the policy was applied. We also report some limitations of the Porter Hypothesis. The possibility that an environmental regulation generates a win–win situation is prone to be a rather exceptional result that only appears under specific conditions. Economic benefits, if they exist, should be seen as a positive side-effect to support the main objective of environmental regulation, which must be to protect the environment. The Porter Hypothesis can be seen as an additional argument to apply environmental policies when the balance between benefits and costs is apparently unclear, as the economic costs are prone to be overestimated by firms.

This chapter reviews recent developments on the analysis of the impact of clean technologies on the outcome of transboundary pollution games and on the size of stable environmental agreements. It is shown that given a fall in the emissionoutput ratio, countries may respond by increasing their emissions resulting in an increase in pollution stock and decrease in welfare. This rebound effect happens when the damage and/or the initial stock of pollution are relatively large and when the natural rate of decay of pollution is relatively small. This implies that clean technologies may not be a substitute for cooperation on mitigation.

Over the past decade, international organizations — the WTO and the OECD, notably — have pledged for a swift liberalization of trade in environmental goods and services (EGS). Yet, no international agreement directed specifically at this industry has so far been reached, except for the one adopted in 2012 at the Asia–Pacific Economic Cooperation (APEC) summit. This chapter examines the reasons for this apparent failure. We first highlight some key idiosyncrasies of the EGS industry regarding custom regulations and the stakes for each party. A strategic trade analysis of the respective interests of developing and developed countries reveals asymmetric incentives, which sheds some light on the existing contrast between enthusiastic political statements and the lack of concrete agreements. The relevance of global trade accords as a tool of EGS policy is next discussed. Some past bilateral and regional trade and environmental settlements, and the solutions they might suggest to the current stalemate, are finally considered.

This chapter provides a step by step discussion about applications of differential games to global natural resources and environmental problem. It begins with providing an example that highlight the distinction between two main solution concepts: open-loop Nash equilibrium and Markov-perfect Nash equilibrium. This is followed by three applications: (1) global pollution, (2) externalities in the use of antibiotics and (3) the shallow lake problem, which involves multiple equilibriums and bifurcation. The policy implications are clear: because of ill-defined property rights and externalities, the unrestrained pursuit of profits can result in inefficient outcomes, and appropriate policy measures should be designed to guide economic agents to achieve Pareto efficiency.

The following section is included:

• Index