Financial transfers to sustain international cooperation in the climate change framework

Germain, Marc [UCL] van Ypersele de Strihou, Jean-Pascal [UCL]

This paper deals with a a cooperative game theoretic analysis of the economics of international agreements on climate change. To cope with the question of the voluntary implementation of the international optimum, a financial transfer scheme is proposed under which no countries nor subgroup (coalition) of countries would have an interest not to join to the international agreement. The transfer scheme presents the originality to be designed in a closed-loop dynamic framework where cooperation is renegotiated at each period taking account of the current stock of pollutant. The transfer scheme is applied to the climate change problem, making use of a simple model inspired by Kverndokk (1994) and Nordhaus and Yang (1996). The results show that with the proposed sidepayments, international cooperation is indeed individually rational and rational in the sense of coalitions.