The Global Climate Game

Abstract

The present paper studies emissions abatement in a global game of technological investments. Players invest in competing technologies. One technology is cheap and dirty, the other expensive but green. Technological investments are strategic complements. While such games typically have multiple equilibria, uncertainty about the green technology’s true potential leads to selection of a unique equilibrium. Applied to international environmental agreements, the model yields sharp predictions on when a treaty targeting abatement technologies gets ratified. Under well-identified conditions, countries adopt the dirty technology even though that is inefficient. In a two-stage version of the game, I study the incentive to cooperate on green R&D prior to signing an international agreement. When used to inform domestic policy, the model suggests a novel policy of network subsidies. A network subsidy virtually guarantees efficient adoption of the green technology but is not, in equilibrium, paid out.

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