There is no world government, so the free rider problem needs to be solved by providing incentives to participate by changing perceptions of the marginal benefits of contributions.
Such an incentive can be provided by some players (in this case governments) taking the lead by setting unilateral commitments to some reductions in their emissions per head in the coming years, combined with an offer to do more if others make commitments. This is the strategy that Garnaut sets out.
Garnaut has proposed that Australia be prepared to undertake a modest effort to reduce emissions unconditionally, but to make a substantially greater commitment in response to others. If the United States, the European Union and Japan adopted a similar approach, that would create a very large incentive for economies like China and India to reduce emissions. The marginal benefits of doing so would be many times greater than the benefit that would flow from the marginal costs they would incur.
A coherent initiative by some of the currently high emissions economies could provide the basis for an agreement on agreed trajectories for emissions per head for some years ahead.
Unfortunately, in each of those years, the free rider problem would recur. All economies have an incentive to fail to meet their commitments, while hoping others will stick to theirs.
Under these conditions we cannot expect to induce the huge research and development effort to reduce the cost of the adjustment to low-emissions economic development to a politically acceptable level.
To overcome this problem, the world needs a cost-sharing solution which not only encourages wider participation over time, but also contains incentives to keep reducing emissions of GHGs.
Hans Gersbach in the Economists’ Voice (published by the Berkeley Electronic Press) sets out a potential Global Refunding System for to resolve the climate change cost-sharing problem.
The basic proposition is that some of the largest industrial countries
… agree to put a significant, though not extraordinary, amount of money into a fund, the Global Climate Fund. Then, the countries agree to a constitution by which money will be paid out according to reductions in emissions: the Global Refunding System (GRS).
He explains how the fund could operate in a way which would encourage wide membership. While countries could join without large initial commitments, there would be an ongoing capacity to encourage marginal reductions in emissions by all members of the scheme.
Gersbach’s article is brief, and worth the read. It is one of a series of articles in a special issue of the Economists’ Voice on global climate change.
Gersbach’s insight is not the only potential solution. But it is the kind of imaginative application of game theory which will be needed to meet the climate change challenge. It is valuable input that could push the 200 governments towards an agreement in Copenhagen on a workable solution to the cost-sharing problems which confront climate policy.