Of Climate change, Nash equilibrium and David Ricardo

Kelvin Teo

The Copenhagen climate change summit in 2009 will go down in history as a failure of sorts, from the failure of national actors to find solutions to supranational problems to the failure of vision, leadership and compassion. The ensueing fallout was tainted with finger pointing, especially at the developed countries for the failure to establish a binding treaty. There was a pessimistic outlook during the wake of the failure of the talks, with the International Energy Agency estimating that such could cost the world at least $1 trillion.

The Yale Global Online, a publication of the Yale Centre for the Study of Globalisation carried a damning verdict by Bo Ekman; the fiasco in a nutshell was attributed as far back as 1648 to the Peace of Westphalia treaties whereby the concept of a sovereign state was established. With national sovereignity comes with it the desire of individual nations to assert each of its own national interest and such comes at the expense of trans-boundary or supranational interest. Evidently, it seems like an insurmountable task to get all 192 nations to agree on a solution to a geophysical problem such as climate change. What exacerbated the problem was that negotiators took the wrong track by pandering to the hegemonic interests of developed countries.

The 2010 United Nations Climate Change Conference held in Cancún, Mexico, had what seems to be a more optimistic outcome; what transpired was an agreement, but not a binding treaty, which aims to limit global warming to less than 2 degrees celsius above pre-industrial levels. Naysayers, however, are quick to point out that such an agreement is merely lip service, and nothing will ever progress from there. Assuming the most pessimistic scenario, it is apparent the nations involved are deadlocked in a Nash equilibrium.

What exactly is the Nash equilibrium? Put simply, Nash equilibrium is a solution concept to a game involving two or more players in which each player is aware of the strategies of the others, and none of the player has anything to gain by changing his strategy. In the situation whereby a player maintains his strategy whilst the others keep theirs unchanged, the result is a Nash equilibrium. It was the result of John Forbes Nash’s work for his doctoral dissertation, in which he later gained recognition culminating in a 1994 Nobel Prize in economics. Thus, how is the Nash equilibrium relevant to climate change negotiation? Assuming players are countries with a choice between taking action to mitigate climate change and not taking any action, the pay-off for each strategy could be vastly different. Using a fictitious example of countries A and B, the pay-offs for each of their strategies are as follows in figure 1.

The pay-offs in this example in the event of each country taking action to mitigate climate change is -3 each, the reason being in order to reduce emissions, each country would have to scale back on certain industries that produce greenhouse emissions, and such would have a negative impact on the economy. However, if both countries fail to take action to mitigate climate change, the pay-off will be -2 for each due to the effects of greenhouse gas contributions of each country that resulted in climate change. In such a pay-off matrix, there is a single Nash equilibrium with each country falling to take action. Game theorists have long attempted to model climate change negotiations using the Nash equilibrium, which is applicable for non-cooperative games, and could explain why little headway is made during such negotiations simply because each country will not deviate from its chosen strategy of not taking significant action to mitigate climate change.

For the climate change negotiation process to make real progress and headway, players representing every nation on this planet have to switch from non-cooperative game mode to cooperative game mode. In cooperative games, players form binding committments, contracts or agreements with each other, and each involved has to adhere to his promise. In the context of such cooperative games, international trade theory, in particular the law of comparative advantage developed by David Ricardo, is of importance in such cooperative settings.

Basically, every country has a comparative advantage, which is basically a good or service that can be provided at a lower opportunity cost than other countries. Production is maximised in the country that specialises in that particular good and service, and with trade makes the latter country better off. Within the context of climate change negotiations, of particular interest is the production of good or services that involves minimal emissions.

Thus, in such a cooperative setting, a group of countries can pledge to take action to mitigate climate change, but there is one caveat – to make up for the loss of production and economic costs if there is scaling back of greenhouse gas emitting industries. And that is where international trade, especially comparative advantage kicks in. For instance, if the country has comparative advantage in goods and services that result in minimal greenhouse emission, it can through cooperation with other partner countries form trade links. Maximised production of such goods and services come into effect and the latter are subsequently exported to partners. Thus, it is possible to make up for the shortfall to the economy as a result of the scaling back of greenhouse gas emitting industries. A myraid of options can be explored in such cooperative agreements, for instance transfer of green technologies or even exporting of environmentally friendly products such as hybrid cars. Overall, it can result in a win-win situation, because firstly national interests are safeguarded, and secondly, as a result of the fulfillment of the first point, there is a supranational committment to mitigate climate change.

Arguably, climate change negotiations remain in a Nash equilibrium deadlock, which is why it is not surprising that the chances of progress are met with pessimism. Thus, it is essential that players from every country involved interact in a cooperative relationship. In such negotiations, it is not a good idea for climate change mitigation to be the sole subject on the platter. Climate change negotiations should be carried out in tandem with trade negotiations, where countries can explore trade opportunities and form trade links that involve the movement of goods and services that produce minimal greenhouse emissions during their production. A rethink should be on the cards with regards to the international negotiation of climate change, which should involve the element of international trade that could safeguard the national interests of the country involved.