Countries have been negotiating on climate change for about 23 years, and talking about it for even longer. In that time, steps have certainly been taken: a range of institutions have been created, from a UN convention to elements of a global market for CO2 emissions reductions. But one thing there has not been very much of is actual reductions in emissions; for example, observe that the annual rate of increase in atmospheric CO2 has been more-or-less constant at two parts per million for the last 30 years (Figure 1)1. Repeated rounds of negotiations (including, infamously, Copenhagen in 2009) have as yet failed to deliver an international treaty in which the world’s major emitters agree to binding targets for reducing their emissions.
Figure 1. The atmospheric concentration of CO2
Unilateral, not multilateral, action is no surprise
This comes as little surprise to economists working on the formation of international environmental treaties such as on climate change. International treaties have to be self-enforcing, in the sense that no country can be forced to sign and there is nothing to stop signatories from withdrawing except their own interests (witness Canada’s recent withdrawal from the Kyoto Protocol). At the same time, in providing environmental public goods across borders, there is a strong incentive for any country to free-ride on the efforts of everyone else. As a result of these two characteristics, economists have showed that you will either see treaties with near-universal membership, but that do very little2, or treaties for which each signatory does a lot, but to which there are very few signatories (c.f. Barrett, 1994).
Green shoots of unilateral activity
However, if you scratch the surface of international activities to abate CO2 then you will see that there is, suddenly, lots of activity. In particular, you will observe various countries, and even states or cities within countries, implementing unilateral measures to reduce emissions. There are lots of examples, from the familiar (e.g. the package of measures adopted by the EU) to those that most people have probably yet to hear about (did you know that Mexico has adopted ambitious and legally binding targets for CO2 emissions reductions, as early as 2020, and for the share of electricity generated by renewables?). While the sum of these unilateral actions still falls well short of what would be required to stand a reasonable chance of limiting global warming to 2°C (a target countries signed up to in 2010 at the Cancún climate summit), there is certainly more dynamism and progress than meets the untrained eye.
The missing explanatory link: Lobbying
This presents more of a disconnect with the standard economist’s story (Kolstad 2012, Ostrom 2009); while this story certainly envisages some scope for unilateral action, it is typically small. So what’s going on? Our new research (Dietz et al. 2012) offers one explanation. It starts from the observation that there is possibly something important missing from virtually all of the existing contributions to the literature; lobbying. These contributions assume that governments negotiate as unitary agents, basing their choices on costs and benefits that are simple national aggregates, and similarly on a single set of national-level motivations.
This strong analogy with the strategic behaviour of individuals and firms is natural for economists to make, but it clearly glosses over the reality that various domestic lobby groups shape environmental policy, including how national governments cooperate with others to form treaties. The important role of lobby groups in policy formation has been emphasised by political economists (Besley 2006; Persson and Tabellini 2000; Grossman and Helpman 2001) and by scholars of environmental policy and politics. The latter, in particular, identify environmental policymaking as a battle between business lobby groups on one side, and environmental lobby groups on the other. To a first order, business lobby groups seek to limit the scope of costly environmental measures, while environmental lobby groups do the opposite3. Importantly, these scholars have looked to the evidence of past policy formation and argue that neither the business lobby nor environmental groups can be said to have won the battle in general.
A new way of thinking about treaty formation
Inspired by this, we propose a model of treaty formation, where lobby groups seek to influence policy by offering to fund political campaigns. Specifically, the model consists of the following stages;
- First, governments, whose objective functions include both lobby-group contributions and aggregate social welfare, choose whether to be signatories to a treaty.
- Second, domestic lobby groups present their own governments with prospective contributions, which depend on the abatement policy chosen.
- Third, governments (both signatories to the treaty and non-signatories) choose their abatement policies.
- Fourth, firms decide how much to produce, taking as given the abatement policy set by the government (Figure 2).
This structure allows us to capture the influence of domestic lobby groups on treaty formation through their effect on domestic abatement policies, without making any a priori assumptions about the preferences they might have over coalition formation per se. In this way the abatement standard can be interpreted as a ‘political variable’, whose value is anticipated by governments when deciding whether to sign the treaty.
Figure 2. Coalition formation with lobbying
Competing lobby groups can mean higher abatement levels
Using the stage game, we show that rival lobbying by environmentalists and business groups can translate into higher abatement levels (i.e. more stringent policies) than in the absence of lobbying. Moreover, what is interesting about this result is that it comes from increased unilateral action, rather than action within a treaty. This is a step towards reconciling the theory with what is now happening in places like the EU and Mexico.
As an aside, we can further show that, in some instances – especially when governments put a lot of weight on lobby-group contributions – lobbying may lead to higher levels of abatement even in the case where only business is exerting pressure. This is a twist on a classic result. If governments are highly susceptible to lobbying, business pressure waters down the benefits to cooperation, and environmental damage is given little weight. But at the same time it waters down the incentive to free-ride. The result is an agreement in which signatories do little individually, but the number of signatories is sufficiently large to result in relatively high levels of total abatement. Figure 3 shows both of these results. Gamma indicates a government’s susceptibility to lobbying; γ = 0 corresponds to the case where the government’s objective only comprises gifts from lobby groups, while γ = 1 corresponds to the case where the government is impervious to lobbying and aims to maximise social welfare. Thus γ = 1 corresponds to the no-lobbying case in the standard literature.
Implications for the negotiations
Our findings have both positive and negative implications for action on climate change. The bad news is that our results essentially reinforce the position, whereby negotiating a climate treaty that is both broad, in terms of countries involved, and deep, in terms of emissions cuts beyond what countries would have done anyway, will be difficult. On the other hand, we find that the combined presence of national interests and lobbying pressure may create more scope for unilateral action than previously thought.
This chimes with the conclusions of Elinor Ostrom (2009) and Vincent Ostrom (2010) that the trust gained and lessons learned through many parallel actions by agents at various levels – what they call 'polycentric governance' – are more likely to bring about progress than waiting for a comprehensive, top-down international treaty.
The key for a climate treaty will thus be, in part, how unilateral action can best be leveraged. In any case, there are benefits to a climate treaty that are not modelled here. For instance, we don’t account for the fact that the climate negotiations can be seen as a public good in themselves, with benefits relating to the ability of participating countries to win trust and establish profitable relations.
Figure 3. Emissions abatement as a function of the weight on lobby contributions.
Barrett, S (1994), “Self-enforcing international environmental agreements”, Oxford Economic Papers, 46, 878-894.
Besley, T (2006), Principled Agents? The Political Economy of Good Government, Oxford, Oxford University Press.
Dietz, S, C Marchiori and A Tavoni (2012), “Domestic Politics and the Formation of International Environmental Agreements”, Centre for Climate Change Economics and Policy, Working Paper, 100 and Grantham Research Institute on Climate Change and the Environment, Working Paper, 87, London, LSE.
Grossman, G and E Helpman (2001), Special Interest Politics, Cambridge, Mass, MIT Press.
Kolstad, C D (2012), “Bridging reality and the theory of international environmental agreements”, in Hahn, R W and A Ulph (eds.) Climate Change and Common Sense: Essays in Honour of Tom Schelling, Oxford, Oxford University Press, 61-74.
Le Quéré, C M R Raupach, J G Canadell, C Marland et al. (2009), “Trends in the sources and sinks of carbon dioxide”, Nature Geoscience, 2, 831-836.
Ostrom, E (2009), “A Polycentric Approach for Coping with Climate Change”, World Bank Policy Research Working Paper, 5095, Washington, D C, World Bank.
Ostrom, V (2010), The Quest to Understand Human Affairs: Natural Resources Policy and Essays on Community and Collective Choice, Lexington Books.
Persson, T and G Tabellini (2000), Political Economics: Explaining Economic Policy, Cambridge, Mass, MIT Press.
1 While we lack a counterfactual, it has been shown that, until the downturn, annual emissions were at the high end of forecasts made by the IPCC in 2000 (Le Quéré et al., 2009).
2 That is, compared to what countries would have done unilaterally.
3 To a second order, the story is evidently more complicated. There are firms whose profits depend on measures to abate pollution, such as the renewable energy industry, and there could also be trading-up incentives on polluting firms who export to countries with higher environmental standards.