Dynamic Transfer Schemes and Stability of International Climate Coalitions

This paper examines the formation and stability of coalitions in international climate agreements with a combined game-theoretic and integrated assessment model. The empirical model comprises twelve regions and investigates partial coalition formation in a one-shot cartel game. We argue that a dynamic transfer scheme, based on a full path of emissions over the planning horizon, can overcome some of the major obstacles in international negotiations by incorporating the expected growth of emissions in developing countries in the distribution of emission permits. The simulation results show that permit trading based on grandfathering permits proportionate to a static base year level of emissions may lead to counter-intuitive transfer flows, and no stable coalitions emerge. This is resolved under a dynamic transfer scheme: we then find two small stable coalitions: a coalition between the European Union (EU15) and China, or a coalition between Japan and India.