International agreements to protect the global environment are typically difficult to reach. In principle they are profitable for all countries involved in the negotiation, but they are also intrinsically unstable due to the incentive to free ride (enjoying the clean environment without paying the cost). In Discussion Paper No 1154, Research Fellow Carlo Carraro and Domenico Siniscalco suggest that it is possible to overcome the instability of the global environmental agreements by linking the environmental negotiation to other international agreements which are intrinsically stable. This is done with a simple model in which a global environmental negotiation is linked to an international agreement on technological cooperation.

The model explicitly considers the interactions between the government and domestic firms in one country, and among governments in different countries. Firms maximize profits and countries maximize their own welfare, which includes profits, consumer surplus and environmental quality. The environmental agreement and technological cooperation can be analysed as two separate negotiations. The environmental coalition is profitable but unstable; technological cooperation is profitable and stable. The linked negotiation is more profitable than the two separate negotiations, and more stable than the environmental negotiation, as it uses the gains from technological cooperation to offset the environmental free-riding incentives and to reach full cooperation both on technology and on the environment.

R&D Cooperation and the Stability of International Environmental Agreements
Carlo Carraro and Domenico Siniscalco

Discussion Paper No. 1154, April 1995 (IM)