Sunday, May 26, 2024

Game theory says the Paris Agreement looks like a winner for the climate

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One of game theory’s classic dilemmas is called the stag hunt. In this scenario, two hunters are out in the woods. Both agree to shoot a deer together. If they cooperate, they may go home with the prize stag. It’s a gamble, but a big reward. Yet they face a choice. Either hunter can choose to trap a rabbit alone instead. The smaller animal, while less tantalizing, is easier to catch. It practically guarantees they’ll have meat in their own pot next meal assuming they give up on the bigger prize.

The key to mutual success—and the biggest win—comes when both parties establish mutual trust and cooperate. If they don’t, they’re each tempted to break the original pact, pursue a rabbit, and end up with less.

That, in a nutshell, describes today’s global climate change predicament, according to game theorists, economists who study strategy dilemmas. Every country would benefit by cooperating, but they’re tempted to cheat by sticking to fossil fuels and continuing to invest in carbon-emitting industries, leaving everyone worse off.

Game theory—a branch of economic theory that uses math to predict how players will respond to a competitive situation when the outcome depends on how players react— offers one of the best glimpses into how this might end.

The climate game is playing out under the international agreement called the Paris Agreement which commits countries to limit global warming to below 2 degrees Celsius, thus avoiding the most catastrophic effects of climate change. Right now, the most optimistic game theorists say this strategy could be a winner because it’s structured just like a stag hunt, also known as an assurance or trust game.

“Game theory tells us that it is possible to balance costs and benefits in such a way that every country is net better off,” says Parkash Chander, professor of economics at Bennett University in Delhi and author of Game Theory and Climate Change, “The benefit from controlling climate change, minus costs, equals no negatives.”

In a climate stag hunt, rules can be designed to ensure no single country wants to defect, and the rewards of mutual trust outweigh those from pursuing one’s short-term self interest, says Anders Fremstad, an environmental economist at Colorado State University. The Paris accord, unlike the Kyoto Protocol, is well designed to spur collaboration, but only, says Fremstad, if “the world can agree on which game we’re playing.”

What makes the Paris agreement like a stag hunt?In 2015, countries signed the Paris Agreement, a “legally binding” pact committing to ambitious emission reductions by 2030 and net-zero emissions by mid-century. But the 195 signatories are only legally required to prepare and report on their climate action strategies. They’re not obligated to reach or even set meaningful targets. If countries craft inadequate plans, there are no penalties.

Even without conventional sticks and carrots, game theorists, including Chander, believe that countries will choose to avoid extreme warming—hunt the stag, in other words—though acting in one’s own self-interest would lead to reliable, short-term payoffs.  

Yet there is a more pessimistic scenario. Another classic game theory scenario is known as the prisoner’s dilemma. In this quandary, two thieves taken to separate interrogation rooms must either cooperate (remain quiet and evade jail time), confess (and face a lighter sentence), or turn in the other (condemning one or both to imprisonment, if both choose to snitch.) Remaining silent is in the suspects’ best interests as a pair, but only if both refuse to confess. Without faith that the other won’t inform, they are strongly incentivized to betray their partner.

This has happened before in climate policy. Game theorists like Chander say the 1997 Kyoto Protocol was structured more like a prisoner’s dilemma, ensuring its failure. The agreement was a one-time deal that imposed requirements on its signatories without creating conditions for mutual trust. “It was safer not to cut emissions, just as it was safer for the proverbial prisoner to betray their partner,” he explains.“Under Kyoto, cutting emissions would have led to a greater [financial] loss if the other players did not do the same thing.”

Thus, countries were essentially encouraged to let other nations take action, to watch as other nations invested in decarbonization and environmental conservation, while allowing their own economies to continue growing, by manufacturing and trading goods made in coal-powered plants, for example, or by clear-cutting forests.

By contrast, the Paris agreement reverses this dynamic by asking countries to voluntarily set their own targets—called nationally determined contributions—and mandating regular reviews of goals and progress. That structure has convinced far more countries to join the agreement, enhancing trust in future commitments, and increasing the odds that Paris will ultimately cut global greenhouse gas emissions.

It also recognizes emission cuts—and climate damages— are more costly for some countries. “The benefits and costs differ across countries and you have to balance them,” says Chander. The Paris treaty structure, by using mechanisms like climate finance to balance the scales, allays countries’ concerns about being trapped in a prisoner’s dilemma. “If there is a country which doesn’t suffer from climate change, but which is emitting a lot of carbon dioxide,” Chander says, “why would that country control their emissions unless they are paid something?”

Chander also argues every additional Conference of Parties meeting, such as COP26 held last year in Scotland, strengthens countries’ perception that the Paris pact is incentivizing low-carbon technologies. In fact, the international consensus behind the treaty already appears to be driving a virtuous cycle: firms convinced there will be future demand for cleaner technologies are supplying them at ever lower costs. Even large US corporations once opposed to dramatic climate action, including automakers and retailers, have signaled their preference for the US to remain a signatory and pursue the treaty’s goals.

“Many new technologies are being invented that will mitigate climate change [because] there appears to be a commitment on the part of countries that ‘We are serious about mitigating climate change,’ says Chander. “With the Kyoto Protocol that seriousness wasn’t there.”

Will countries follow through on their Paris climate targets?Not everyone agrees the Paris accord ensures serious climate action. Oleg Smirnov, an associate professor of political science at Stony Brook University, thinks it’s safer to assume that countries will continue to prioritize their short-term economic interests and protect polluting industries rather than pursue climate action.

Smirnov sees the Paris treaty as a collective-risk social dilemma game, meaning it shares features of the prisoner’s dilemma and the stag hunt. Players share a common goal, he explains, but there is also an incentive to freeload. By not switching to renewable sources of energy or making costly infrastructure investments, most nations will let a few take the biggest steps.

To test this, he uses real-world emissions data rather than building entirely theoretical models, unlike most game theorists. He says his aim is to be as realistic as possible, not prescriptive, arguing that a game theorist’s job is to create a tool that offers only insights. “We emphasize the difficulties that world leaders face,” he says. “We also try to point at the opportunities that exist. But ultimately, it’s up to policymakers and world leaders to make use of these findings.”

When Smirnov plugged this data into his models to see if the Paris targets could still be reached after former US president Donald Trump declared he would withdraw the US from the Paris Agreement, the result raised red flags. He found that for Paris to be successful in that case, not only would other countries need to compensate for the departure of the US, but the burden would fall on large developing economies such as China, India, Mexico, and Brazil. According to his analysis, wealthy, developed countries would hit their limits in terms of new emission cuts given their existing ambitious pledges, while developing countries left to make up the difference would find that unfair.  The Paris process, in other words, would be in great jeopardy.

America’s re-entry to the Paris accord under the Biden administration has not spurred Smirnov to update his model, at least not yet. “We know, historically, words don’t necessarily translate into action,” he says, adding that we don’t know who the next president will be “or the president after that.”

Game theory may need to get practicalOther researchers don’t share Smirnov’s view of game theory as a neutral tool. These academics seek to reshape events, not merely predict what will happen next. Nicola Wittur, a fellow in the department of mathematics at the London School of Economics who has studied communication in game theory, is among them. She argues game theorists should be proactive advocates for designing smart agreements or auctions, given the global stakes.

To do this, she believes game theorists must constantly tweak their models to account for new information. Some researchers are modeling factors like the expanding clean energy sector, but they have yet to account for more amorphous variables such as changes in voters’ preferences, grassroots political movements, or even second-order effects of climate change, such as the rising cost of healthcare and climate migrants.

This effort might force game theorists studying climate negotiations to integrate the work of philosophers and behavioral economists, she suggests. By enhancing their models with political developments and real-world variables, game theorists could provide climate leaders with more actionable advice and precise, nuanced perspectives.

Why WWIII is good news for climateOne encouraging fact gives some researchers hope: World War III. Or rather, the fact that it hasn’t happened. Many political scholars once insisted that if countries want to avoid wars or militarization, they risked exploitation or invasion, a classic prisoner’s dilemma. But the international order has managed to avoid wars between major powers.

A game theorist who frames climate action as a prisoner’s dilemma “nihilistically tells us there’s nothing we can do,” says Fremstad. If business as usual is always in countries’ best interests, climate treaties are doomed to fail. But that’s wrong, he argues, as supported by the lack of a global military conflagration since World War II. “It turns out, we’re at a pretty good equilibrium,” says Fremstad. “We’ve mostly avoided all-out war between powerful countries over the last seventy years.”

In fact, human cooperation has arisen despite the fact that individuals and groups have always been able to pursue their own narrow interests. The key, says Fremstad, has been changing norms. He argues the international community has reached a point where invading or attacking another major country is considered unacceptable. “We recognize that can’t possibly be the way we interact with each other anymore,” he says.

Russia’s invasion of Ukraine, after which most of the world’s major democracies enacted unprecedented sanctions on Russia and allies of president Vladimir Putin, might seem to contradict that. But the US and NATO are intent on avoiding a direct confrontation with Russia. Leaders in the West have made it a point to condemn the act as a violation of international order and call the invasion “a breach of civilized behavior,” according to Prime Minister Boris Johnson.

Likewise, complacency in the face of climate change should be considered as objectionable as invading another country or starting a war, says Fremstad.  The Paris accord is one way that new norm is being created. The coalition of like-minded countries, influential enough to convince other countries to join, has advanced decarbonization without the punitive compliance mechanisms common in trade deals. Ultimately, he says,”we need to make it unacceptable to extract all the coal and burn it.”

In most assurance games, going first entails a cost. Actors must trust others will follow. Fremstad argues climate action under the Paris agreement is different since the benefit from leading on climate change is “impossibly huge,” while free-riding could lead to reputational damage. “Everyone who thinks we’re in a prisoner’s dilemma should seriously consider the possibility we’re an assurance game,” he says. “What we need more than anything is global leadership to build that critical mass.”

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