The transmission of pollutants in the atmosphere and in water is a major source of international externalities, as individual countries benefit from using the environment as a receptacle for their own emissions but incur environmental damage from these emissions and those reaching them from abroad. Without appropriate supranational institutions, these problems can only be resolved by agreements among sovereign countries. This entails several difficulties, however, since national attitudes towards the environment differ according to preferences, levels of development and endowments. The incentive to free-ride to enjoy a cleaner global environment without paying for it is also an intrinsic source of instability in any agreement.

In Discussion Paper No. 568, Research Fellow Carlo Carraro and Domenico Siniscalco develop a game-theoretic model to analyse such agreements' profitability and stability in which sovereign countries' interaction depends on parameters related to their preferences, technologies and the transmission of emissions. These are closely related in turn to the specific pollutant involved, which may explain some conflicting results in the recent literature.

Carraro and Siniscalco find that for certain pollutants, where the interdependence of emissions is high, non-cooperative emission control will achieve effective environmental protection, but only cooperative agreements can achieve such protection as interdependence decreases. With trans-national transportation of pollutants, cooperation among all countries is more effective than non-cooperative behaviour, but without binding agreements the free-rider problem makes such fully cooperative outcomes unstable. In many cases, small coalitions of countries are profitable and stable, even if they are second best in terms of aggregate emissions. Such gains from partial cooperation can be used to expand a coalition by self-financed utility transfers, however, if environmental policy is backed by other instruments (such as trade, development or debt policy) and a minimum degree of commitment is introduced into the game.

Carraro and Siniscalco note in conclusion that the normal method of reaching agreement on global or international environmental protection through comprehensive negotiations requiring full cooperation is very difficult; but their results offer an alternative blueprint. Countries with stronger environmental preferences may form small coalitions and then try to `buy' other countries. The key players in environmental negotiations are very few (the European Community, the US, the Soviet Union, China and Brazil), and some of these appear already committed. Also, their finding that non-cooperative emission control can provide effective protection may explain why so many `agreements' merely formalize reductions that would have been attained without them.

Strategies for the International Protection of the Environment
Carlo Carraro and Domenico Siniscalco

Discussion Paper No. 568, August 1991 (AM)