Self-Enforcing Environmental Federations : Unanimous Climate Coalitions in General Equilibrium

We propose a novel mechanism for coalitional policies in a climate coalition. In our proposed setup, national (unilateral) and federal (multinational) emission policies coexist. A joint federal institution, appointed by all members, sets a joint emission policy for its members and must attain Pareto improvements relative to the noncooperative outcome. We compare this proposal to the well-established model of an international environmental agreement in which member countries cooperatively decide about a common policy that maximizes joint welfare. We relax the questionably strong assumption of cooperative joint maximization in established models of international environmental agreements and provide a framework that consistently assumes rational governments that maximize national welfare. We provide a microfounded model with asymmetric countries that leads to moderate coalitional climate policies. These weaker climate policies are in line with the rational self-interest of countries and can help to stabilize larger coalitions. We show that they can lead to lower global emissions and higher global welfare than previously proposed models of international environmental agreements with utilitarian joint welfare maximization