Game theory and climate change
Industrial Landscape, by L.S. Lowry (1955)
This week (August 2021) saw the release of the sixth IPCC report on the state of the world’s climate. It created headlines by stating in clear text what has already been fairly obvious for some time by looking at emission graphs: The world will not succeed in limiting global warming to a 1.5 degree increased average. Apart from the fact that decarbonizing a society is inherently difficult, one of the main reasons why it’s so hard for countries to cooperate on this problem is because it resembles a common game theoretical condition which has been mathematically proven to be hard to solve: The Prisoner's Dilemma.
The Prisoner’s Dilemma describes a situation wherein two rational individuals acting out of their own self-interest do not produce the optimal outcome.
It’s typically illustrated by two arrested criminals who have the option of ratting each other out or staying silent. If both keep silent they will serve one year in prison each, creating a total punishment of two years. This would be the best overall outcome.
If both betray each other they will both serve two years in prison, which would be the worst overall outcome. The crux of the example is when one prisoner stays silent and the other decides to betray. In this scenario the betrayer would go free, while the silent criminal would serve three years in prison. Thus creating an optimal outcome for one of the criminals and a worst outcome for the other. This means that there is an incentive for both criminals to betray each other and create the worst overall outcome. This constitutes something called a Nash equilibrium in game theory, which shows how rational players in this scenario would be wise to not cooperate , because they individually have nothing to gain by opting for anything other than the selfish strategy. The worst outcome is a so-called dominant strategy.
Countries have been trying to come up with some sort of plan to solve climate change since the Kyoto conference, back in 1997. Each subsequent conference has seen a raised sense of urgency and more concrete promises of action, yet very little is happening. The reason why climate change constitutes an example of a prisoner's dilemma is simple: If all nations cooperate to limit pollution, everyone will be better off. If no nations limit pollution, everyone will be worse off. If however, a few nations limit their pollution, but others do not, the nations trying to cooperate will be even worse off, assuming there is an economic benefit to pollute. These nations will neither be able to stop climate change, nor receive the economic benefits of polluting. This creates a similar incentive to keep doing the thing which creates the overall worst outcome, as in the prisoner’s dilemma, namely doing nothing at all. In economic science another word which describes this type of situation is the tragedy of the commons:
It describes how open and free access to a resource causes depletion of that resource because everyone follows their own narrow self interest in exploiting it, contrary to the common good of all users. In the case of climate change the resource could be said to be planet earth. Other narrower examples of the tragedy of the commons would be: the overfishing of a sea, the emptying of a well, or even the overcrowding and littering of a space such as a tourist destination.
The Golden Rule and the case for cooperation
The prisoner's dilemma is called a dilemma precisely because of how the Nash equilibrium shows how players don’t have an incentive to cooperate. Luckily, this is not always the case if you are allowed to replay the game over and over with memory of previous outcomes. This is also known as iterated prisoner’s dilemma. In this case other successful strategies can emerge, such as “tit for tat” which is just another word for the Golden Rule: “treat others as you would like others to treat you”. This simple strategy appears in one way or another in almost every major religion and culture in history and is probably older than civilization itself. For good reason. Research by political scientist Robert Axelrod has shown how greedy strategies tend to perform badly compared with more altruistic strategies when many games of iterated prisoner’s dilemma are played with a large number of players, which he uses as part of his explanation for why human cooperation even exists in the first place. If one is fascinated by the game theoretical aspects of all this there is a whole lot more to cover, as I have barely scratched the surface, but the point is that there are ways to overcome the dilemma if one gets to play multiple times.
In the case of climate change one could argue that each week, month or year when nothing is done constitutes another round of iterated prisoner’s dilemma. The longer nations refuse to cooperate the higher the price they pay for it. There is no fixed number or rounds, but if nations continued to pollute indefinitely there would presumably be some sort of ultimate game over. That might not mean the literal end of the world, but it could for example be when the climate reaches a cascading tipping point: when multiple feedback loops of the climate create a runaway greenhouse effect which cannot be reversed or minimized.
The question then becomes, is there a practical way to increase the chances for cooperation strategy to emerge in time? This is where one could introduce the idea of a trade deal with some game theoretical aspects in it.
Carbon tax and carbon tariffs
The first thing to note is that economists have already developed a very good and simple plan to combat climate change: the carbon tax.
The simplest way to think about a carbon tax is as a mechanism to reflect the true cost of pollution. The damage caused by burning say a barrel of oil will have to be paid by someone at some point in the future, rather than the person burning the oil today. The carbon tax would seek to find an answer to just how much damage the oil burning would eventually cause and add it to the original cost, thus creating a fairer price. Apart from this simple principle economists have some clever ideas on how the tax can be implemented with minimal disruption to how societies operate: The tax would start low and increase gradually to give people time to adjust and find alternative ways of going about their business. Another brilliant idea is to give the money collected by the tax directly back to taxpayers, evenly distributed in the form of tax dividends. This would create a strong financial incentive for people and companies to avoid activity which causes emissions and to innovate and find alternatives, while protecting especially the poorest in society from the negative consequences they will experience from not being able to organize their lives as before.
The economic idea behind the carbon tax is as far as I have gathered uncontroversial and considered to be a sound response to climate change. Many nations, organizations, think tanks and activists have been working to implement it for years. As of 2019, 46 countries have implemented some version of a carbon tax. So, why are emissions still increasing? The problem here takes us back to the prisoner’s dilemma. If a carbon tax is the optimal solution to reduce emissions, the ideal cooperation strategy of the world would be for everyone to implement the same progressive carbon tax at the same time. The problem is that a majority of nations haven’t implemented it at all. Many of those who have, have only done so half-heartedly, by exempting key industries, or not growing the tax fast enough to reflect the true cost of pollution, and the urgency of the situation. If any one nation were to fully implement a carbon tax as prescribed above, their industries would be at a competitive disadvantage compared to everyone one else’s. So, even though the perfect strategy seems like it’s already invented, the Nash equilibrium prevents it from being implemented.
Borrowing inspiration from the Golden rule, or “tit for tat” strategy. It would seem obvious that nations should not be allowed to refuse a cooperating strategy unpunished. A good and fair way to treat nations that want to keep polluting would be the implementation of carbon tariffs: Sure your products might be cheaper than ours because we tax our industries the true cost of pollution. But if you won’t tax your industries, we will. Carbon tariffs would prevent polluting nations from exporting their competitively advantaged products to non-polluting nations.
The problem here is practical. The world economy is dependent on the free flow of goods in order to function. By suddenly creating a bunch of new trade barriers one would throw the world into another recession. Besides, where would the initiative come from? As in the case of the carbon tax, it doesn’t work when only one nation implements it. If any single nation implements a carbon tariff they would only accomplish to isolate themselves from the world economy. There would have to be a critical mass of nations agreeing to the principles of the carbon tax and the carbon tariffs in order for it to work.
Critical Mass Agreements
An interesting concept for how to deal with this type of situation is the concept of a Critical Mass Agreement. This is the example of deals that only go into effect once they reach a critical mass of members. An example of this can be studied in the American election system. In the US there is something called the National Popular Vote Interstate Compact (NPVIC), which is a convoluted name for a plan of how to get rid of the Electoral College system in the United States.
Because of the perceived problems caused by the Electoral College system, many Americans have wanted to get rid of it for a long time. However, in order to do so one would need at least a three fourth majority in Congress in order to amend the American constitution. While that makes it not impossible it’s fairly improbable. Especially when doing so would be to the immediate benefit of the party with the most popular votes. The NPVIC however is a plan to use a loophole in the law which dictates that electors get to vote for whomever they want. States that sign the Compact agree that their electors will ignore the state outcome and vote for the winner of the national popular vote. When a simple majority of states have agreed to the Compact the Electoral College would effectively vote to dismantle itself.
Crucially the states agreeing to this are only obliged to ignore their own votes when the agreement reaches the critical mass needed to win the election. Meaning that the states don’t have to sacrifice their right to vote for their candidate in the interim. Consequently the political cost of signing the agreement is much lower. The idea behind the NPVIC only surfaced in the early 2000s. It was first adopted in 2007 when 8 states signed it. Now in 2021 it’s been adopted by 15 states and has 72% of the votes needed to give it legal force. Currently (as of 2021) another 8 states are pending a decision.
Could something similar be conceivable for a climate change agreement?
A climate compact?
A climate analogy to the NPVIC might look something like this: A few nations that take climate change seriously would come together and agree to an intention to implement an international carbon tax, set at an equal level so as to not give each other a competitive disadvantage. They would also agree to put tariffs on imported goods not produced under a similar tax, effectively forming a trade block. This would be analogous to the early version of the European Union,the European Coal and Steel Community (ECSC). As in the case of a climate compact the ECSC was designed to give European countries a financial incentive to cooperate to the benefit of one another rather than fight, which it proved exceptionally successful at doing.
The signing of the ECSC agreement in the 50’s
However, as in the case of the NPVIC the agreement would not come into effect unless everyone signs it, or at least a critical mass. Exactly what constitutes critical mass in this case would have to be the subject of some economical study, but it would probably have to be a decent part of the world economy. As an example one could imagine that the treaty enters into effect when 50% of the world economy has signed it. Whatever the number it would have to be sizable enough that being left outside of the agreement would put your exporting industry at a serious disadvantage, while the nations on the inside would have a theoretical chance of making up the shortfall caused by new trade barriers.
This could be really the entirety of the agreement. Keeping the aspirations of the agreement relatively simple would probably increase the chances that nations would sign it. Inspired by the EU one could however imagine additional provisions to make signing the agreement more tempting, such as differentiating timelines for implementing the tax, based on the development level of a nation’s economy, or a common development fund which would help pay for replacing the polluting infrastructure of poorer nations joining the agreement. Or maybe the dismantling of existing trade barriers within the block to further increase the competitive advantage of joining the agreement. The introduction of additional block wide taxes on companies and top earners and efforts to destroy tax havens and capital flight could also be a tool to help offset the disadvantages to low-income earners caused by the tax.
One could also imagine that other non-CO2-related pollution could be subject to a tax, such as plastic and soil pollution, dumping of toxic waste, over-fishing etc. Exactly where to draw the limit would certainly be the subject of some controversy. Many additional policy provisions would undoubtedly be tempting to implement, but looking at the example of the EU it would probably be wise to avoid an image of overregulation and disrespect of national sovereignty as much as possible. Simply introducing a global carbon tax would be worth the effort alone, and much better than nothing.
The crucial aspect is how nations could sign the agreement of intention without being forced to immediately act on it. This is similar to how nations currently promise to reduce their emissions by a certain year, but don’t act on it. In fact, no nation currently has a clue on how they are going to effectively reach their targets without destroying their economies in the process. A climate compact would create a roadmap for how to actually reach the targets and create a game theoretical safety which guarantees that they won’t lose the prisoner’s dilemma in doing so.
This is the hypothesis of the proposal: That by creating an agreement that protects nations from the worst outcomes of a bad prisoner’s dilemma strategy, you increase the chances of a cooperation forming in time. As opposed to the example of the NPVIC agreement which is just about an obscure election system, one could also argue that there will be a much higher cost to continuing to ignore a climate compact. Every year that nations refuse to sign the agreement would be another iteration of the game where the prospects of the world’s climate will look increasingly dire. In the meantime nations could continue to do what they are currently doing: Encourage their citizens to eat less meat, buy an electric vehicle and set lofty emission targets that more than likely won’t reach. As average temperatures continue to increase and the effects of warming become ever more apparent to the world’s population, the political will to do something will also increase. The signatory nations can then point to the agreement and say; look, all you have to do is sign. In the meantime we won’t do anything. Tit for tat. Only when we reach the level where doing something is no longer a losing strategy will we have to change.
Enforcement of climate treaties
Continuing the analogy of the prisoner’s dilemma and the tit for tat strategy, it should be reasonably expected that nations would try to betray the agreement if it ever went into effect. Since the purpose of the agreement is not to create permanent trade blocs, but to make ignoring climate change so painful that everyone would eventually agree to cooperate, an obvious strategy for nations would be to join the agreement, collect the benefits and promptly ignore the rules and continue to pursue a selfish strategy. The example of the EU has also shown a great weakness in the lack of effective tools to react when member states intentionally ignore the original requirements for joining.
This means that in order for the agreement to work, participating nations would have to agree to some level of observation and sanctioning of non-compliance. There would probably have to be some sort of neutral observers that would be allowed to inspect the economy and industry as in the case of disarmament agreements, to see that the tax is actually implemented and that there is no corruption of the process. This could be combined with CO2-monitoring satellites that could measure if the tax is actually having the expected effect on each country’s emissions.
There would then have to be some sort of independent court which would have a mandate to give a nation some sort of penalty point if it is proven beyond reasonable doubt to be ignoring some of the rules. If a nation receives, let's say three penalty points, they would be automatically kicked out of the block. Since the goal is not permanent exile but to dissuade cheating, a nation could reapply to join after a fixed amount of years. In the meantime their industry will have been effectively isolated from the world economy, creating a strong incentive to not cheat.
Summary
We already have the policy plans needed to address climate change. They do however require cooperation in order to work. Cooperation which is inherently difficult. By researching the example of The Prisoner’s Dilemma it should be possible to design a trade deal which gives nations better incentives to play a cooperative strategy.
Sources:
https://www.ipcc.ch/assessmentreport/ar6/
https://en.wikipedia.org/wiki/Prisoner%27s_dilemma
https://en.wikipedia.org/wiki/Tragedy_of_the_commons
https://en.wikipedia.org/wiki/Golden_Rule
https://en.wikipedia.org/wiki/Pigovian_tax
https://en.wikipedia.org/wiki/Carbon_tax https://www.researchgate.net/publication/318571485_Critical_Mass_Agreements_The_Proven_Template_for_Trade_Liberalization_in_the_WTO
https://en.wikipedia.org/wiki/United_States_Electoral_College
https://en.wikipedia.org/wiki/National_Popular_Vote_Interstate_Compact
https://www.npr.org/2016/11/02/500112248/how-to-win-the-presidency-with-27-percent-of-the-popular-vote
https://www.youtube.com/watch?v=tUX-frlNBJY
- Educational youtuber CGPgrey which first introduced me to the NPVIC
https://en.wikipedia.org/wiki/European_Coal_and_Steel_Community
https://www.nature.com/articles/d41586-018-06963-4 - CO2 monitoring satellites