American Economic Association

Climate Treaties and "Breakthrough" Technologies Author(s): Scott Barrett Source: The American Economic Review, Vol. 96, No. 2 (May, 2006), pp. 22-25 Published by: American Economic Association Stable URL: http://www.jstor.org/stable/30034607 . Accessed: 03/09/2013 08:37
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ALTERNATIVE TO GLOBAL AND BEYOND: APPROACHES KYOTO WARMINGt

ClimateTreatiesand "Breakthrough" Technologies

By ScoTT BARRETT* An effective climate change treatymust promote the joint supplyof two globalpublicgoods: climatechangemitigationand knowledgeof new costs. R&D technologiesthatcan lowermitigation is especially needed to bring about substantial, long-termreductionsin atmosphericconcentrations of greenhousegases, for this will requirethe development and diffusion of revolutionary, I. Hoffertet "breakthrough" technologies(Martin al., 2002). In principle,such an outcomecould be realizedby the Kyoto Protocolapproach,if that were strengthened overtime. However, agreement thatresponsemay be inadequate (Kyotomakesno provisionfor R&D)-and, as I shall demonstrate, unlikelyto succeed. Can a treaty system relying directly on targeted R&D and the adoption of breakthrough technologies performbetter in this same setting of anarchicinternationalrelations?I will show that, as a general rule, the answer is no. Essentially, the same forces that undermine Kyoto also challengethe R&D andtechnologyapproach. There is one exception to this rule: R&D leading to breakthrough technologies exhibiting increasingreturnscan improve dramaticallyon the Kyoto approach,even when these technologies are otherwise inferior to the alternatives This suggeststhatourapproach available. to treaty design shouldbe strategic. I. The KyotoApproach decisions Begin by consideringthe abatement of countriesin the absenceof a multilateral agreement. Let qi denotecountryi's abatement and let with N countries, Q denote aggregateabatement;
t Discussants: Jeffrey Frankel, Harvard University; David Victor, StanfordUniversity. * School of Advanced International Studies, Johns Hopkins University, 1619 Massachusetts Avenue NW, Washington, DC 20036, and Yale Center for the Study of I Globalization,Yale University (e-mail: sbarrett@jhu.edu). am grateful to Michael Hoel and Lee Lane for comments. 22

Q=

there exists a unique ment levels independently, in which every country,i, plays Nash equilibrium qi = b/c. If countrieswere able to cooperatefully, each would play qi = bN/c. these incentives. Kyoto strove to restructure Under the rules of international law, however, A in suchan agreement is voluntary. participation as the equilibrium of a treatycan be represented stage game with countriesdeciding whether to in stage 1; with partieschoosing their participate abatement levels collectivelyin stage 2; and with nonpartieschoosing their abatementlevels independentlyin stage 3. As is usual, we solve the game backwards. of the earlierabatement Since the equilibrium = is in dominant b/c, game, qi strategies,it must of the stage 3 game. Letalso be the equilibrium ting k denote the number of signatoriesto the collectivemaximization by signatories agreement, that each signatory mustplay bk/cin stage implies 2. Finally,lettingwr, and denotethe payoffto a r,n respectively,a Nash signatoryand nonsignatory, of the equilibrium stage 1 game is a participation level k* satisfying 7rr(k*)> 7r,,(k*- 1) and it is easy 7r(k* + 1). Upon substitution, >-7rn(k*) to show thatthe equilibrium level is participation k* = 3 for N l 3. A treatyconsistingof just three countries willnotmakemuchof a difference whenN is large.The agreement increasesaggregateabatement from bN/c to just b(N + 6)/c. Full cooperation requiresthatabatement increaseto bN2/c. Though this result emerges from a special robust model, it can be shown to be qualitatively It is also consistent with the (Barrett, 2005). Kyoto Protocol'shistorythus far. Kyoto has more than threeparties,but it has failed to securethe participationof the world's biggest emitter,the United of other countries States, and the participation came at a price of their not being subjectto any emission limits or being given a surplusof emission entitlements("hot air").If parties take full of the treaty'strading mechanism,their advantage

wi= bQ - cq2/2.If countrieschoose theirabate-

u= qi. Let countryi's payoff be given by

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VOL.96 NO. 2

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collective emissions may not fall at all. If they eschew trading, however,thencompliancemaybe injeopardy. BecauseArticle18 saysthatanybinding compliance mechanism must be agreed to by an amendment,and no such amendmenthas been agreedto, the Kyotoemissionlimitsaremore thanlegal.Kyotomaynotbe self-enforcing. political II. AlternativeTreatySystem An alternativeto Kyoto is a system of two treaties, one promoting cooperative R&D and the other encouragingcollective adoption of a breakthroughtechnology emerging from this R&D. The decision to adoptthe new technology depends on the attractionsinherentin the technology itself, not the cost of developing the technology (once incurred, this cost is sunk). The returnsto R&D depend on the prospectsof any new technology being adopted, however. Analysis of this treaty system therefore must begin with the technology adoption treaty. III. TechnologyY Treaty Breakthrough technologieswill be sector-spenot cific, applicableto the whole economy. The emissionlimits emergingfrom the previousanalysis, however,can be decomposedby sector.Suppose that the sectorof interesthas the same cost functionas the whole economy, only with a differentcost parameter, co. All the resultsobtained will go through as before (for this previously sector),providedwe substitute co for c. The problem, then, is for every country, i, to choose whetherto adoptthe new technologyor abateits emissions using the "old"technology (in which case marginalcost will equal c0qi). Call the new technology Y and let countryi's payoff be given by
N / (1) Tri = byy+E J -cYi

with yi, Yyj E{0,1 }. As formulated,these techare nologies mutually exclusive. Moreover, of the new technology results in a adoption discrete drop in emissions. It is perhapseasiest to think of Y as a zero-emissions technology (a new renewable energy technology, or a system for carbon captureand storage), and by as representing the environmentalbenefit of adopting Y.1 Of course, c, is the cost of adopting Y. - c, > b2(2N - 1)/2co, all Assuming byN countries will be collectively better off when each adopts Ythan when each abatesan amount b/co using the old technology. If Y is costly enough, however-if, in particular,by - c, < b2/2co-then each countrywill choose independently to abate b/co ratherthan to adopt Y. Coulda treatypromoteadoption of Y?Consider a stagegame with every countrydecidingin stage 1 whetherto be a partyto a technologyadoption agreement;with parties deciding collectively in stage 2 whetherto adoptthe new technology;and with nonpartiesdeciding individuallyin stage 3 whetherto adoptthe technology. By the assumptionsalreadygiven, each nonsignatorywill choose to reduceits emissions by b/co, ratherthan adopt Y, in stage 3. In stage 2, signatorieswill choose to adopt Y if and only if their collective payoff for doing so is at least as large as their collective payoff for not doing so (where the alternative is for each country to abate its sector emissions by b/co). Let there be k, signatories. If these signatories adopt the technology, they each gain byk - cy. If they do not adopt the technology, they each gain b2(2ky- 1)/2co. Adoption is collectively rational provided byk, - c, b2(2ky - 1))/2co. rational for Rearranging,it will be collectively Y to adopt provided ky, - ko, k, signatories where ko is the smallest integer at least as large as (2coc, - b2)/2 (coby - b2). By our previous assumptions,ko lies between 2 and N. - rrn(k? - 1) => bko Notice that rrs(ky) c >- b2(2ko - 1)/2co, and this relation is true by definition. Also, 7rn(ko)l iiw(k + 1) > and this inequalityis true by b2/2co - by cy, assumption.Hence, k* = kois an equilibriumof the stage 1 game, and this equilibriumcan be shown to be unique.

co( -yi)q2,

' Denote each country's emissions in the absence of abatementusing the old technology by e. Then, if Yis a zero emissions technology, by = be.

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24

AEAPAPERS ANDPROCEEDINGS

MAY 2006

In contrastto the Kyoto approach, the technolunder the ogy adoptionagreementcan, right circumstances, sustain a large number of parties. However, k* will be large only when a large numberof countriesmustadoptthe technologyin orderfor adoptionto makethese countriescollectively betteroff. Of course, it is precisely under such circumstances that the treatywill not make all countriessubstantially betteroff. IV. R&D FinancingTreaty Since the knowledge of how to develop this breakthrough technology is a public good, how can it be financed? Suppose that the R&D cost of Y is Since financing must be My. before the decision to adopt has been supplied made, no country will know in this preliminary stage which countries will adopt the technology; each can foresee only that k* countries will adopt Y. It seems reasonable to suppose that each country will decide to finance R&D to develop new technology based on its expected payoff. If country i contributes an amount mi to the collective R&D effort, i's expected payoff will be (2)
I

V. Technology X Treaty Consider now a different kind of technology-call it technology X. Unlike Y,X exhibits increasing returnsto adoption. Specifically, let country i's payoff now be given by

(3)

7Ti=

bx i+i
j/i

Njei

Xj Xi

N
+ b (1
-

xi)qi +

(1 - xj)qj

- co(1 - xi)q2/2 with x, xi E {0,1}. Assume + b2/2co > bx > cx + b2(2N - 1)/2Nco. This implies that X cxN2not be may adopted spontaneously (nonadoption is a Nash equilibrium)but that all countries would be better off collectively if X were adopted universally. By the assumptionsabove, every countrywill adoptX providedenough othersdo. Let z denote the tipping point-the minimum number of other countries that must adopt X for it to become attractive for every country to adopt X. From (3), z is the smallest integer greaterthan or equal to N(b2/2cocx + 1 Under our bxcx). must lie between and N - 1. z 1 assumptions, Participationin a treaty mandatingadoption of technology X is a coordinationproblem. To sustain full participation, such a treaty must specify that parties adopt X, but that the agreement enter into force only if ratifiedby at least z countries.No countrycan lose by signing such an agreement,while every countrywill gain by signing once the threshold z is crossed. Moreover, we know from before thatfull financingof the R&D costs of X can also be sustainedby a self-enforcing agreement provided the total cost, Mx, is sufficiently low. This treaty system can sustain full participation even when it would be in the collective interest of a small numberof countriesto cooperate independently-and, thus, even when the aggregate gains to cooperation are substantial (assumingthatMxis small enough). This means that, even if technology Y were superior to X (taking into account R&D costs), given universal adoption, a technology X treaty system may

=
-N
(Nby

cy)

) - b2
2co

with Y = 1 if =EN1 mi : MY;Y = 0, otherwise. The term in brackets represents the expected gain to i of k* countries adoptingtechnology Y (by an earlierassumption,this value is positive). Financing this R&D is a "threshold"public good and it is easy to see thatfull financingwill be an equilibrium,providedthe bracketedterm in (2) exceeds M,/N. A treaty is required to secure the needed finance-but only to coordinate contributions(coordinationis needed provided My exceeds the value of the bracketed term in (2), for, in this case, zero financingis a symmetricNash equilibrium). however,only Financingwill be forthcoming, if the collective gain to having Yexceeds and My, I have alreadyshownthatthe formervalue will be small when adoptionmustbe sustained by a selfIf Myis nontrivial, the comenforcingagreement. bination of an R&D and technology Y treaty system would likely not be pursued.

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be preferredto a technology Y treaty system, given the need for treaties to be self-enforcing. VI. Discussion The reasoning developed in this paperfavors a strategic approachto treaty design-one that includes collective financing of R&D and the techadoption, in key sectors, of breakthrough nologies exhibiting increasing returns. Such a system may not be fully cost-effective in the usual sense of the term, but this may be the price that must be paid to sustain greatercooperation. In a world characterizedby technological lock-in (path dependence), it cannot be assumed that markets will pick the best technologies simply because the price signals are right (Paul A. David, 1985), whether these are transmitteddirectly throughtaxes or indirectly through permit prices. Even without lock-in, emission taxes are not guaranteedto sustain an efficient outcome when abatement costs are nonconvex (Michael Hoel, 1998). The value of having a new technology to addressglobal climate change depends on more than its intrinsic merits; it also depends on the extent to which the technology will be diffused, subsequent to its development. An improved solar technology (type Y), capable of producing energy at a lower cost than fossil fuels, would be ideal-but may not be forthcoming. The next best option is to considertechnologies that, though perhaps more costly than the type Y alternatives,exhibit increasing returns.It is at these (type X) technologies, theory suggests, that currentR&D should be directed. Are there reasonable prospects for type X technologies in the two most important sectors, transportationand electricity generation? A shift to a breakthroughautomobile technology such as hydrogen is very likely to be characterized by increasing returns, because of knowledge spillovers, economiesof scale, and the need to combine a new automobile especially technology with a supporting fuel infrastruc-

ture. Increasing returns are likely to be less importantfor the productionof hydrogen fuel, however. Increasingreturnsalso do not featurelarge in electricity generation.The light water standard may dominate nuclear reactor design (Robin Cowan, 1990), but nuclearpower is not generally favored over alternativesources of generation. Similarly, carbon capture and storage, being essentially an add-on technology, seems not to have desirable propertiesfor diffusion. There may exist other possibilities for this sector. Hoffert et al. (2002), for example, explain that renewable energy would become more attractiveif the electricity transmissiongrid were reengineered. Overall, however, the prospects for a technology X in the electricity supply sector do not appearbright. The approach developed here thus fails to offer a ready solution to the climate change mitigationproblem.It does, however, commend a refocusing of currentefforts. REFERENCES Barrett, Scott. Environmentand statecraft: The Oxstrategy of environmentaltreaty-making. ford: Oxford University Press, 2005. Cowan, Robin. "Nuclear Power Reactors: A Study in Technological Lock-In."Journal of Economic History, 1990, 50(3), pp. 541-67. David, Paul A. "Clio and the Economics of QWERTY." American Economic Review, 1985(Papers and Proceedings), 75(2), pp. 332-37. Hoel, Michael. "Emission Taxes versus Other EnvironmentalPolicies." ScandinavianJournal of Economics, 1998, 100(1), pp. 79-104. Hoffert, Martin I.; Caldeira, Ken; Benford, Gregory; Criswell,David R.; Green, Christopher; Herzog, Howard; Jain, Atul K., et al. "Advanced Technology Paths to Global Climate Stability: Energy for a Greenhouse Planet." Science, 2002, 298(5595), pp. 981-87.

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