The global warming game - Simulations of a CO2-reduction agreement

We analyse incentives for, and the benefits of a possible international cooperation to reduce CO2-emissions. The negotiations are modelled as a reciprocal-externality game in CO2-emissions between 5 world regions. CO2-emissions affect the players in two ways: First, each country's income depends (via energy inputs) on the amount of CO2 emitted. But emissions may also cause future damage due to climate change. The paper calculates illustrative estimates of the Nash equilibrium and the social optimum. It shows that the currently observed differences in countries' attitudes towards a CO2-reduction agreement can largely be explained by economic factors.