Impact of social externalities on the formation of an international environmental agreement: an exploratory analysis

• Author: Armando Sacco,Georges Zaccour
• DOI: http://doi.org/10.1111/itor.12559
• Published date: 01 January 2019
• Date: 01 January 2019

Intl. Trans. in Op. Res. 26 (2019) 64–79

DOI: 10.1111/itor.12559

INTERNATIONAL

TRANSACTIONS

IN OPERATIONAL

RESEARCH

Impact of social externalities on the formation of an

international environmental agreement: an exploratory analysis

Armando Saccoaand Georges Zaccourb

aDepartment of Methods and Models for Economics, Territory and Finance Sapienza – Universit`

a di Roma, Italy

bChair in Game Theory and Management, GERAD,HEC Montr ´

eal, Canada

E-mail: armando.sacco@uniroma1.it [Sacco]; georges.zaccour@gerad.ca [Zaccour]

Received 30 March 2017; receivedin revised form 10 April 2018; accepted 17 April 2018

Abstract

Weanalyze the impact of social externalities (SEs) on the stability of an international environmentalagreement

(IEA). Weconsider a framework in whichplayers are divided into two homogeneous groups,namely,developed

and developing countries. We assume that members of an IEA get someadditional benefits, to which we refer

as SEs. One main result is thatany coalition that is internally stable will expand to include all countries,which

is related to the minimum participation clause considered in some papers. However, our minimum, which is

endogenously defined, is not the largest stable coalition size, but the grand coalition.

Keywords:international environmental agreements; social externalities; stability; noncooperativegames

1. Introduction

As academic and political circles repeatedly point out, a large number of countries—if not all

of them—must participate in emissions abatement efforts if we are to effectively deal with global

environmental issues, for example, global warming and climate change. In the last two decades

or so, an extensive literature used game-theoretic models to study the problem of building or

designing international environmental agreements (IEAs). The choice of such a paradigm, which

takes strategic interactions into account, is quite natural because the emissions and abatement

decisions made by any country will have an impact on the well-being of all the others.

The branch of the literature that has adopted a cooperative game approach has followed a two-

step procedure to design an IEA. First, one computes the collectively optimal emissions under

the assumption that the grand coalition forms. Second, one allocates the total emissions reduction

burden among the different parties using one of the available cooperative game solutions. For

instance, Petrosjan and Zaccour (2003) use the Shapley value to share out the total emissions,

whereas Germain et al. (2003) call upon the core; see the literature reviewin Jørgensen et al. (2010).

[Correction added on May 21, 2018, after first online publication: Article title wascorrected.]

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A. Sacco and G. Zaccour / Intl. Trans. in Op. Res.26 (2019) 64–79 65

The noncooperative game literature, to which this paper belongs, starts from the idea that,

in the absence of a supranational authority that can impose and manage emissions reductions,

an IEA must be based on voluntary participation. The early papers in this stream are Barrett

(1994) and Carraro and Siniscalco (1993), where the authors obtained the now classical result that

without additional incentives, only a few countries will join an IEA. Following this grim result,

many scholars attempted to include mechanisms to increase participation in an IEA, for example,

punishing nonmember countries (Hoel and Schneider, 1997; Breton et al., 2010), transfer schemes

(Fuentes-Albero and Rubio, 2010; Pavlova and de Zeeuw, 2013), imposing a ratification threshold

or a minimum clause (Courtois and Haeringer, 2005;Rubio and Casino, 2005; Carraro et al., 2009;

Weikard et al., 2015), and issue linkage (Botteon and Carraro, 1998; H¨

ubler and Finus, 2013). For

a survey on the stability and design of IEAs,see Finus (2003, 2008), Benchekroun and Long (2012),

and Marrouch and Chaudhuri (2016).

The motivation for not signing an environmental agreement is crystal clear: every country would

prefer to let others reduce emissions, so they can simply enjoy a better environment without paying

the cost. The idea behind the above-mentioned mechanisms is to counterbalance the benefits of

free riding by imposing a cost on nonsignatories, for instance by imposing trade sanctions or by

rewarding the countries that do join the coalition with access to exclusive IEA members’ clubs, such

as trade or R&D agreements. By adding benefits to its members, the idea of a club good has been

shown to be successful in enlarging the participation in a climate coalition (Carraro and Siniscalco,

1997; Nagashima and Dellink, 2008). In this same positivespirit, Cabon-Dhersin and Ramani (2006)

put forward the idea that in being an IEA member, a country becomes part of a social network,

and de facto, gets extra gains, which they call social externalities (SEs). An illustrative example

here is Russia signing the KyotoProtocol to improve its international status before the forthcoming

vote on its admission to the World Trade Organization. More generally, these externalities can take

the form of monetary, moral, political, or any other benefits. As some of these gains are in fact

intangible,they are very difficult to measure. However,this should not be a deterrent to exploring this

ave nu e.

In the quest to design an IEA, we need to keep in mind that countries are asymmetric in many

respects. In particular, they differin ter ms of their past contributionsto the environmental problems

and in terms of their current priorities. All observers agree that industrialized countries are mainly

responsible for the current state of the environment, and any agreement should take this into

account. The Kyoto Protocol reflected this asymmetry by asking developed countries (Annex I

countries) to reduce their emissions, but not asking developing countries (Annex II countries) to

do the same. Further, compared to other pressing economic and social issues, such as eradicating

extreme poverty, offeringessential services to their citiz ens (education,health care, etc.) and building

infrastructure, the environment is seen as a luxury that developing countries cannot really afford in

the short term.

The objective of this paper is to explore the impact of SEs on the formation of an IEA. Our

work is directly related to Cabon-Dhersin and Ramani (2006) and Mallozzi et al. (2016a, 2016b).

In Cabon-Dhersin and Ramani (2006), the assumption is that all players are homogeneous, and

the authors measure the benefits of SE through a positive function of the number of cooperators.

Mallozzi et al. (2016b) used the same measure, but considered heterogenous countries, while in

Mallozzi et al. (2016a) they consider a dynamic framework. We differ from these in the following

two important ways:

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2018 The Authors.

International Transactionsin Operational Research C

2018 International Federation of OperationalResearch Societies