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Inequality in Climate Change Games

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BY ALESSANDRO TAVONI 14/02/2015

Inequality has long been the focus of much economic thinking. To name but a few, Kuznets (1955), Sen (1973) and Wilkinson (1996) have written extensively about the subject of income inequality and its relationship to economic growth. In 2014 the issue has once again taken centre stage, with the publication of the English version of Thomas Piketty’s (2014) Capital in the Twenty-First Century, which reconstructs the evolution of income and wealth over the past three centuries by means of tax data, concluding that a causal link exists between capitalism and accelerating wealth concentration. The book’s politically charged implications have produced stark reactions, leading some to compare the French economist with Karl Marx (The Economist, 2014).

Whatever the causes, there is no denying that wealth inequality is an enduring, if not expanding, state of past and modern economies, and the repercussions are felt among many dimensions. One such dimension is environmental. A key question here is whether our planet’s carrying capacity can keep up with economic and demographic expansion at the unprecedented rates experienced globally since the Depression (Arrow et al., 1995). Are we pushing the limits of the ‘safe operating space for humanity’, and risking tipping the Earth into catastrophe by crossing one or more planetary boundaries for acceptable environmental change (Rockström et al., 2009)? Evidently, this question relates to the nexus of ecological resilience and socio-economic forces, calling for integrated efforts and cross-disciplinary approaches (Tavoni and Levin, 2014).

The problem of cooperation

In this article I will focus on the problem of environmental cooperation by reviewing some game-theoretic literature dealing with the ‘wicked problem’ of conciliating individual and collective incentives (social dilemma situations), while facing inequality and tipping points subject to various degrees of uncertainty. This class of ‘games’, which includes common pool resources and public goods games, is suitable to study the management of environmental commons, since they share important features. Tipping points, or thresholds, mimic the possibility of catastrophic and irreversible regime shifts characterized by a system’s sudden transition from more benign states to harmful ones (Scheffer et al., 2003; Tavoni et al., 2012; Lade et al., 2013). Alternatively, they can be used to capture the idea that addressing global environmental problems such as climate change requires widespread cooperation in the face of individual incentives to refrain from it and ‘free-ride’ on the effort of others (Barrett et al., 2014). Just a small amount of investment in the mitigation public good will not suffice in guaranteeing avoidance of dangerous climate change. To complicate matters, the location of social and ecological thresholds is often subject to irreducible uncertainty, which means that there will inevitably be disagreement about what the appropriate effort is in order to reach the target. A third issue with qualitatively similar consequences is inequality among parties: like uncertainty, it crowds out the sense of common responsibility, paving the way for free-riding behaviour (Tavoni, 2013 and 2014).

Let us begin by briefly looking at how the interplay between inequality, non-linearity of damages and uncertainty has shaped climate change negotiations.

The Framework Convention on Climate Change has warned that climate change may be “abrupt and catastrophic,” rather than linear and smooth, once greenhouse gas concentrations in the atmosphere exceed a certain threshold. The scientific literature confirms the possibility of dangerous thresholds but also shows that there is large uncertainty about their location (Rockström et al., 2009). In addition, international climate negotiations that aim to reduce global greenhouse gas emissions are strongly influenced by a conflict between rich and poor countries. Consequently, the Kyoto Protocol addressed this North-South equity issue by recognizing the Industrialised nations’ special responsibilities through the principle of ‘common but differentiated responsibilities’.[1] However, major polluters and great powers, such as China and the US, have until recently proven reluctant to bind themselves to internationally agreed ambitious emission reductions. How can this deadlock be broken? As real world data on alternative mechanisms is not available, we must rely on theory and experimental economics. While both use simplified settings, and in the case of experiments on convenience samples, these methods have the advantage of allowing one to isolate in a controlled manner the effect of relevant features (such as inequality and uncertainty) on cooperation.

The game

The theoretical and experimental papers below are based on threshold public goods games, where groups failing to coordinate on a minimum contribution face a high probabilistic loss. Specifically, the underlying setup is as follows: groups of four to ten players, endowed with some money (either in a symmetric or asymmetric fashion), have the option to contribute to avoid a collective loss in one or multiple successive rounds. The aggregate contributions over all rounds and players are then evaluated to see how they stack up against the required investment, and a large fraction of the unspent endowment is taken away from players if the threshold has not been met. Thus we have a discrete public goods game with no refund, which generally features two symmetric equilibria among which to coordinate: a provision equilibrium where the burden is equally split and the threshold met, and a non-provision equilibrium where all players selfishly choose to keep the entirety of their endowment and take a gamble in the hope that others will contribute a sufficient amount.

Inequality

An essential feature of the global climate change game is that inequality in endowments is mirrored by inequality in past appropriation of the climate commons; roughly speaking, the richer a nation is, the more it has ‘used’ the atmosphere by emitting CO2. Tavoni et al. (2011) introduce and test in the lab the effects of inherited inequality in wealth and appropriation on coordination success in reaching the safety target, and how this is mediated through communication of contribution intentions in the form of pledges. They do so by distributing endowments unequally in two treatments, and by giving them the option to communicate the intended contributions in two further treatment. Symmetry and lack of communication serve as control treatments. They ?nd that inequality reduces the prospects of reaching the target but that communication increases success dramatically, as shown in Figure 1.

GraphTavoniNote: Base and Pledge are the symmetric treatments (without and with communication, respectively), followed by the two corresponding treatments featuring wealth inequality. Adapted from Tavoni and Dannenberg (2013).

 Furthermore, leadership appears to be an important engine of collective action, as successful groups tend to eliminate inequality over the course of the game, with rich players signaling willingness to redistribute early on. Related experimental and theoretical studies confirm the importance of leadership (Bosetti et al., 2015; Dietz et al., 2012; ?ri? et al., 2015), especially on the part of wealthy actors (Vasconcelos et al., 2014). Together, these findings suggest that coordination-promoting institutions and early redistribution from richer to poorer nations are both decisive for the avoidance of dangerous climate change.

Uncertainty

A crucial question, if we want to be able to inform policy by means of controlled experiments, is whether the above findings are replicable and robust to changing some of the features. In a related laboratory experiment, Dannenberg et al. (2014) compare how coordination success is affected by knowledge about the location of the threshold. In particular, they introduce either risk, in treatments where the threshold is a random variable with known probability distribution, or ambiguity, in treatments where the probability distribution of the threshold is unknown. Results indicate that threshold uncertainty is detrimental for the provision of the public good. Whereas all groups succeed in preventing the public bad when the threshold is known, this result is not replicated in the presence of threshold uncertainty. Contributions are generally lower when players do not know ex-ante the exact threshold value, and are particularly low and erratic in the treatments involving ambiguity. As in other experiments, early signaling of willingness to contribute and share the burden equitably makes groups more likely to reach a high public good provision level.

Conclusions

The climate change games reviewed here capture trade-offs that are salient for the issue of climate change mitigation. Economic experiments are a promising tool for analyzing such tensions notwithstanding the necessity of design simplicity, as they provide insights into many aspects that are crucial to climate change and coordination more broadly. Given the lack of scientific consensus on who should bear the burden of mitigation costs, providing empirical evidence on the driving forces behind coordination in a setting designed to mimic inequalities, uncertainty and bargaining possibilities faced by actors involved with climate change, should be fruitful from a policy perspective.

 Future work could explore variants of this or different games. For instance, emphasizing mitigation cooperation over catastrophe avoidance coordination would complement the present analysis. Nevertheless, it is tempting to relate the basic structure of this game to the current stage of climate talks. Signaling commitment to contribute appears decisive for coordination, restoring confidence in the commitment of nations to take action rather than to gamble with the global climate. The recently announced US-Chinese agreement on emissions reductions is an encouraging sign and offers a ray of hope that, in the lead-up to the 2015 Paris negotiations, key countries may be more willing than in the past to work together on addressing the common but differentiated responsibilities.

[1] Indeed, this principle has long featured in multilateral treaties. Mentions of common responsibility date back to at least 1949, in relation to maintaining the value of fish, while the idea of differentiated responsibilities is already present in the 1972 London Convention (calling for parties to adopt measures “according to their scientific, technical and economic capabilities”).

ALESSANDRO TAVONI

Research Fellow at the LSE Grantham Research Institute.

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