Strategic interactions and uncertainty in decisions to curb greenhouse gas emissions

Abstract

This paper examines the strategic interactions of two large regions making choices about greenhouse gas emissions in the face of rising global temperatures. Optimal decisions are modelled in a fully dynamic, closed loop Stackelberg pollution game. Global average temperature is modelled as a mean reverting stochastic process. A numerical solution of a coupled system of HJB equations is implemented. We explore the impact of temperature volatility and regional asymmetries on emissions, contrasting the outcomes from the Stackelberg game with the choices made by a social planner. When players are identical, a classic tragedy of the commons is demonstrated in which players in the game choose higher carbon emissions and have lower utility as compared to the outcome with a social planner. Over certain values of state variables, the tragedy of the commons is shown to be exacerbated by increased temperature volatility and regional asymmetries in climate damages. Asymmetries in environmental preferences can, under certain conditions, result in a green paradox whereby green sentiments in one region cause the other region to increase emissions. Interestingly, we also find that a contrary "green bandwagon" effect is possible. At high levels of the carbon stock, green preferences in one region can cause the other region to reduce emissions.