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The Question of Costly Unilateral Action

The Question of Costly Unilateral Action

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Published by Peter Davis
A paper I wrote on why it might be in the interest of various levels of government to unilaterally regulate GHG emissions outside of the international framework.
A paper I wrote on why it might be in the interest of various levels of government to unilaterally regulate GHG emissions outside of the international framework.

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Published by: Peter Davis on Apr 21, 2010
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04/20/2010

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A Strategic Explanation for Unilateral GHG Regulation:
Peter Davis (10593) 
 
Introduction:
As the international climate conference in Copenhagen approaches, the difficulty of negotiating and implementing a comprehensive international agreement for climatechange mitigation has become apparent. There has been considerable progress over the last decade towards the formation of an international climate protection regime.However, for those who see climate change as a cataclysmic and potentiallyirreversible crisis, progress at an international level has been frustratingly slow. Thisfrustration is often perceived to be the driving force behind the proliferation of numerous national and sub-national climate change mitigation policies.The causes and impacts of sub-global voluntary action to reduce the emissions of greenhouse gases (GHGs) is increasingly a subject of interest to social scientists.Whether these programs will ultimately have a significant and durable impact onclimatic change depends on the underlying rationale that is driving their development.If these programs are irrational anomalies, as they are sometimes depicted by theeconomic literature, then they might be predicted to peter out as their costs rise. If,however, these programs are locally rational—not requiring costly philanthropic behaviour—then these programs might be dynamically stable or even dominant.The first contribution of this paper to the existing literature is to formally model acategory of individual behaviour that directly or indirectly reduces the individual’sGHG emissions. The behaviour of interest in this paper is the decision to divest fromlong-term capital stocks that might be exposed to regulatory risks under a globalclimate change regime. The divestment behaviour explained by this model isreinforced by ancillary benefits to the investor from emissions reductions, and by asignalling effect, which can help investors resolve the principal agent problem.The second contribution of this paper extends the results from the private sector toconsider the implications for local and regional public policy decisions. This sectionintroduces the possibility of local ancillary benefits from GHG emission reduction.Alone, these benefits from emission reduction could justify limited local climate protection programs, especially if other regions have enacted similar programs. But,2
 
if the private sector is known to deal poorly with systematic risk and long timehorizons, then the local public sector has an even greater incentive to intervene.The conclusion of this analysis is not that decentralized GHG regulation is a substitutefor a comprehensive climate change regime. Because of carbon leakages, theseunilateral initiatives will have a limited direct impact on short term global GHGemissions. Nonetheless, decentralized GHG regulation is a significant and growing phenomenon. As the proliferation and intensification of decentralized GHGregulation gains momentum these programs can be expected to have an increasingimpact on country level payoffs from an internationally negotiated regulatory regime.Furthermore, in a finite world, the carbon leakages from a marginal regulator can beexpected to decrease as the proportion of regulators increases. For these reasons,decentralized GHG regulation is nontrivial; rather it is the driving force of globalclimate change mitigation.
Literature Review:
The majority of political and economic scholarship on climate change mitigationdeals with the issue of negotiating, implementing and enforcing a comprehensiveinternational regime. Contributions to this debate generally focus on the problem of designing an efficient, yet feasible, mechanism for achieving a socially optimal levelof GHG emissions: one which distributes costs and benefits ethically and efficientlyacross space and time. The emphasis on the international level has overshadowed amarginal scholarship on the local decision making processes that can directly, or indirectly, influence GHG emissions and global climate change negotiations.Even among economists who consider unilateral regulation, it is commonly arguedthat local action to reduce GHG emissions will have negligible, or even perverse,effects on aggregate global emissions. This argument is formalized by Hoel (1991).The game theoretic model Hoel uses is two representative individuals who makedecisions regarding a purely public good, given the expected responses of the other individual. The conclusions of this game theoretic approach to public goods werestrongly pessimistic for unilateral emissions regulation.3

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