Cap, Insure & Compensate : Domestic Policies and the Ratification of International Environmental Agreements

Using Putnam’s two‐level game approach, we discuss the influence of domestic players that can veto the ratification of international environmental agreements on the breadth and depth of such treaties. We first show that in a symmetric Barrett‐type payoff model, veto-players can restrict the bargaining set so that either all or only non‐grand coalitions become “modest” endogenously, making the grand coalition stable and leading to either “broad but shallow” or “broad and deep” treaties, depending on the exact payoff function of the veto players. We then discuss the possibility of compensating veto‐players via domestic policies and the involved timing and commitment problems, and present the novel policy scheme of “cap, insure & compensate” to overcome these problems. In this scheme, the government negotiates an international emissions cap, insures households against climate‐related damages and uses the premium to compensate the domestic veto‐player for its abatement costs, thus ensuring the ratification of the treaty. We finally analyze the performance of this scheme in a simple two‐period model