Possibility and Optimality of Agreements in International Negotiations on Climate Change

We build a three-stage model of international negotiations on regulation of the level of total emissions of greenhouse gases, and examine the possibility of a cooperative agreement and the Pareto optimality of the outcome. First, we derive the condition for Pareto optimal allocations, which is an extension of the celebrated Lindahl-Bowen-Samuelson condition and Chichilnisky et al.'s (2000) result. Next, we show that if the distribution rule of initial emission permits is the proportional rule to the Nash equilibrium emissions in the noncooperative game, then some cooperative agreement can be reached in the negotiations. However, for many other (equitable) distribution rules, no cooperative agreement is possible. Even if a cooperative agreement is attained, the outcome is rarely Pareto optimal.