Brief Summary

I show that emissions treaties may be game-theoretically infeasible if countries worry that cooperation could break down in the future. I then propose ‘subsidy treaties’, which can survive this concern by exploiting the unique cost-structure of renewable electricity: due to their lower variable costs, short-term fixed-cost subsidies for renewables let market forces ensure a displacement of fossil fuels that persists independently of cooperation. To estimate the impact of various treaties, I model the national electricity sectors and damages from warming in the US, China, EU and India. I find that a mutually beneficial subsidy treaty could avoid 40% of CO2 from electricity over the next century, and survive a higher breakdown risk.

Estimates for global CO2 from electricity that could be avoided under a subsidy treaty

Full Abstract

While a coordinated global decarbonization could be mutually beneficial, countries have a unilateral incentive to maintain higher emission levels. The literature has proposed ’emissions treaties’ in which deviations from emission targets would be deterred by threats of sanctions or suspension of future cooperation, once detected. However, such treaties rely on a shared belief that this equilibrium will not be disrupted in the future, and pose severe monitoring challenges in practice. In this work, we examine how cooperation could be sustained today if parties anticipate future disruption of cooperation, and how this changes what they should coordinate on. We find that coordination on subsidies for the fixed-costs of renewable technologies, rather than on emissions levels, becomes more efficient and may be the only incentive compatible option if opportunity costs to cooperation are significant: due to the lower variable costs of renewables, short-term fixed-cost subsidies let market forces ensure a displacement of fossil fuels that persists independently of cooperation. Short-term emissions taxes or targets may fail to incentivize the required investments. Another practical benefit is that subsidy treaties do not require global emissions monitoring. They do require ex-ante estimates of their impact on future emissions and national incomes, which we obtain using a structural model of national electricity sectors and damages from warming. We estimate a subsidy treaty among the USA, China, EU and India for PV panels and wind turbines alone could avoid 40% of CO2 from electricity over the next century, relative to a non-cooperative ‘business-as-usual’.