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Barrett, Scott - The Problem of Global Environmental Protection - Oxford Review of Economic Policy Volume 6 Issue 1 - 1990
Barrett, Scott - The Problem of Global Environmental Protection - Oxford Review of Economic Policy Volume 6 Issue 1 - 1990
SCOTT BARRETT
London Business School1
Suppose that land is communally owned. Every person has the right to hunt, till, or mine the land. This form of
ownership fails to concentrate the cost associated with any person's exercise of his communal right on that person.
If a person seeks to maximize the value of his communal rights, he will tend to overhunt and overwork the land
because some of the costs of his doing so are borne by others. The stock of game and the richness of the soil will be
diminished too quickly. It is conceivable that those who own these rights, i.e. every member of the community, can
agree to curtail the rate at which they work the lands if negotiating and policing costs are zero ... [However,]
negotiating costs will be large because it is difficult for many persons to reach a mutually satisfactory agreement,
especially when each hold-out has the right to work the land as fast as he pleases. [Furthermore,] even if an
agreement among all can be reached, we must yet take account of the costs of policing the agreement, and these
may be large, also.
Demsetz (1967, pp. 354-5)
1
I have benefited greatly from comments made by David Pcarce on an earlier draft of this paper.
68 0266—9O3X/9O$3.O0 © OXFORD UNIVERSITY PRESS AND THE OXFORD REVIEW OF ECONOMIC POLICY LIMITED
S. Barrett
way out of the common property dilemma, as property dilemma is agreement. Yet, just as in the
Demsetz makes clear, is intervention by 'the state, situation Demsetz describes, there are strong
the courts, or the leaders of the community' (em- incen-tives for governments not to co-operate, or
phasis added). In Demsetz's example, the interven- to defect from an agreement should one be
tion manifests itself in the development of private reached. This is the crux of the problem of
property rights to the resource, but the intervention managing global com-mon property, and what
could just as easily involve regulation. distinguishes this problem from the long studied
one of common property management under the
The reason this view is disquieting is that for global jurisdictional control of a central authority.
common property resources there is no World
Government empowered to intervene for the good of Attempts to correct global, unidirectional exter-
all. To be sure, there do exist international nalities will encounter similar difficulties. Con-sider
institutions—most notably the United Nations the problem where certain activities by one country
Environment Programme—which have been given harm all others. A good example is defor-estation of
the mandate to co-ordinate international environ- Amazonia by Brazil. The rain forests play a crucial
2
See Lyster (1985).
3
See Coase (1960). Bargaining has in fact taken place at the bilateral level. A famous example is the Trail Smelter case. The
Canadian smelter emitted pollutants that crossed the US border. The case was arbitrated by an international tribunal comprised
of an American, a Canadian, and a Belgian. The tribunal found that Canada was liable for damages, and also established
emission regulations for the plant. The judicial decisions on this case make fascinating reading. Sec Trail Smelter Arbitral
Tribunal (1939, 1941).
4
Demsetz(1967, p. 357) argues that in the large numbers case, 'itmay be too costly to internalize effects through the market-
place'. Elsewhere, Demsetz (1964) argues that it might in fact be optimal for the externality not to be internalized since the
costs of intcmalization should include the costs of transacting the agreement. But even then the free-rider problem would
prevail; intervention, were it possible, might still be desired.
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OXFORD REVIEW OF ECONOMIC POLICY, VOL. 6, NO. 1
ing global externalities. But in the absence of a co-operation may sometimes wear the disguise of
World Government these mechanisms cannot be co-operation, and section III shows that an outcome
employed without the consent of the sovereign better than the purely nationalistic one can emerge
nations themselves. Every country would be better even where binding agreements are absent. Effec-
off if it agreed to participate in the revelation tive management of global environmental resources
exercise. But each would do even better if others does however seem to rely on the more formal in-
participated and it did not. All will therefore stitution of international law. Section IV discusses
choose not to participate. The crux of the problem the rudiments of a model that explains why coun-
of correcting global externalities, like that of tries would co-operate when the free-rider problem
manag-ing global common property, is that global must surely bite, and what international agreements
optimal-ity demands global co-operation, and yet mean for global social welfare and the welfare of
the incen-tives facing individual countries work in citizens of individual countries. Just as failure to co-
the oppo-site direction. operate may not lead to tragedy, so co-operation
may not buy us very much. Indeed, combining the
The theoretical arguments for supposing that co- analysis of the potential gains to co-operation with
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S. Barrett
emissions does not entirely offset the one country' s level, while each country's marginal abatement
extra abatement). The extent of the benefit enjoyed benefit function must depend on world-wide
by the conserving country will clearly depend on the abate-ment
actions taken by the other countries, and of course all
countries are subject to a similar calculus. It is this In the absence of any co-operation, each country
interdependence which makes calculation of the will maximize its own net benefits of abatement and
potential gains to co-operative management of global in so doing will choose a level of abatement at
common property more difficult. It is better, then, which its own marginal abatement cost equals its
that we work with a specific model. own marginal abatement benefit.3 This is the non-
co-operative (Nash equilibrium) solution to this
To fix ideas, reconsider the problem of global game, and it is shown as abatement level Q' in
pollution. Suppose that the relevant number of Figure 1. Were countries to co-operate fully, they
countries is N. One might think that N would include would seek to maximize the global net benefits of
all the world's countries, but that need not be so, a abatement. Since we have assumed that all coun-
point we return to later. Let us however suppose for tries are identical, the global net benefits of abate-
Figure 1
0 Q* Q" abatement
5
I tm assuming here that every country believes that its choice of an abatement level will not alter the choices of the other
countries; that is, I am assuming zero conjectural variations. One can impose positive or negative conjectures, but these as-
sumptions would be ad hoc. Alternatively, we could determine a consistent conjectures equilibrium—that is, one in whose
neighbourhood every country's conjectures are confirmed by the responses of the other countries. Corncs and Sandier (1983)
find that consistent conjectures can lead to even greater overuse of the resource compared with the Nash equilibrium.
6
This isof course nothing but a restatement ofSamuelson's (1954) rule for the optimal provision of public goods. For
an alternative presentation of these principles, see Dasgupta's (1982) model of a global fishery.
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OXFORD REVIEW OF ECONOMIC POLICY, VOL 6, NO. 1
One sees immediately that the full co-operative Once we permit alternative strategies to be
solution demands greater abatement but, equally, chosen, widen the choice sets themselves, and
gives to every country a greater net benefit. For a allow moti-vations other than self-interest
given size of N, the difference between Q' and Q" can (narrowly defined) to guide decision-making,
be shown to depend on the slopes of the marginal global environmental protection can be enhanced.
abatement benefit and cost curves. De-note the
(absolute value of the) slope of each country's (i) Supergames
marginal abatement benefit curve by the letter b, and
the slope of each country's marginal abatement cost In the above games, strategies are chosen once, and
curve by the letter c. Then it can be shown that the the games are never repeated. But in the common
discrepancy will tend to be small whenever clb is property game countries are unavoidably locked in
either 'large' or 'small' (see Bar-rett, 1989). The a continuing relationship, and this leaves open the
approximate implication of this result is that fairly possibility that they may retaliate and hence that
innocuous pollutants (that is, pollutants for which b is co-operative strategies may be countenanced. Sup-
small) that are very costly to control (that is, that %
7
If countries choose not to co-operate in the initial period, they need not choose Q' in this period. The reason for this is
that the optimal non-co-operative abatement level is contingent on the abatement levels chosen by the other countries.
1
Axelrod's (1984) tournaments of the repeated prisoners' dilemma game suggest that behaviour in the disguise of co-
operation may well emerge. Whether his findings carry over to the common property game with many players, however,
is as yet unknown.
72
S. Barrett
which should not This ambiguity may help ex- reduction in global emission. Matching might
plain why unilateral action to reduce CFC emis- improve matters—Guttman (1978) shows that un-
sions was limited (US Environmental Protection der certain conditions matching can sustain the
Agency, 1988, p. 30576): full co-operative solution. But in the management
of global common property, matching is rarely in-
In 1978 the United States restricted the use of CFCs in
aerosols. While several nations adopted similar restric- voked. Recently, Norway announced that it would
tions (e.g. Sweden, Canada, Norway) and others par- allocate one-tenth of one per cent of its GDP each
tially cut back their use (European nations, Japan), there year to a fund on climate change if other industrial
was no widespread movement to foliow the United countries matched its contribution (on a GDP per-
States' lead. Concerns existed then that other nations centage basis). The offer has yet to be taken up.
had failed to act because the United States and a few En-vironmental groups in the United States have
other nations were making the reductions thought nec- ar-gued that the US should unilaterally surpass the
essary to protect the ozone layer. Similar concerns exist reductions specified in the Montreal Protocol and
today that unilateral action could result in 'free riding' at the same time impose restrictions on imports of
by some other nations. products containing or made with CFCs from
9
The Thirty Per Cent Club consists of the countries that have signed the Protocol to the 1979 Convention on Long-Range
Transboundary Air Pollution on the Reduction of Sulphur Emissions or their Transboundary Fluxes by at least 30 Per Cent
(1985). The UK has not joined this 'club' but it has committed itself to substantial reductions in sulphur dioxide and nitrogen
oxides emissions by agreeing to comply with the European Community Large Combustion Plant Directive.
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OXFORD REVIEW OF ECONOMIC POLICY, VOL. 6, NO. 1
have joined those already in the 30 per cent club, and Britain acting for Canada). In late 1893 the Tribu-
several Eastern European countries have committed nal decided that the United States did not have
themselves to reduce transfrontier emissions by 30 per territorial jurisdiction over the Bering Sea, and
cenL SO2 emissions in the United Kingdom have indeed hence could not keep Canadian sealing vessels
fallen by 37 per cent since 1970, but the levels of high- out of these waters. This effectively sanctioned
stack emissions which affect remote areas have not
fallen. In 1970, when the 37 per cent fall began, we were
open-access harvesting of the species, and co-
the largestemitterin Western Europe. In 1984, we are operation proved impossible to secure (Paterson
still the largest emitter. NOx emissions have not fallen. and Wilen, 1977, p. 94):
In Western Europe only West Germany depos-its more Following the decision of the Tribunal, the diplomatic
SO2 in other countries than does the United Kingdom, efforts of both Great Britain and the United States had
and further significant reductions cannot be achieved by been directed to convincing the other to reduce its
either without controls. sealing in outer to allow the herd to recover from earlier
depradations. No agreement could be reached and in
The Committee's concern in this passage lies less 1897 the United States unilaterally forbade its citizens
with the net benefits to the UK of reducing emis- to engage in pelagic sealing in the North Pacific. At the
10
For legal background on this treaty and its successors, see Lyster (1985).
74
S. Barrett
like the number of signatories, the terms of the reviewed and altered when necessary and often at
agreement, and the abatement levels of all non- regular intervals. The Montreal Protocol is being
signatories to be determined jointly. We also reviewed in 1990, and is then expected to be
require that the agreement itself is stable. A stable strengthened. That this agreement is self-enforc-
agreement is one where non-signatories do not ing is suggested by a comment made by the US
wish to sign the agreement and signatories do not Environmental Protection Agency (EPA) (1988,
wish to renege on their commitment. Then it can p. 30573):
be shown that for identical countries with linear
EPA judged that the obvious need for broad
marginal abatement benefit and cost functions a
interna-tional adherence to the Protocol counseled
stable inter-national environmental agreement against the United S tates' deviatingfromthe
always exists (Barrett, 1989). Protocol, because any significant deviation could
lessen other countries' mo-tivation to participate.
The solution to this problem exhibits many of the
features of actual agreements. The net benefits Self-enforcement is essential in any model of inter-
realized by both signatories and non-signatories national environmental agreements because nation
11
See Lyster (1985) for a discussion of other compliance mechanisms.
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OXFORD REVIEW OF ECONOMIC POLICY, VOL 6, NO. 1
USSR). To become a signatory to the Antarctic terms) when N is 'large', the marginal abatement cost
Treaty of 1959 a country must maintain a scientific curve is flat, and the marginal abatement benefit
research station in the Antarctic and be unani- curve steep. However, we already know that when
mously accepted by existing parlies to the agree- clb is 'small' the benefit of having an agreement is
ment. In these cases non-signatories may quite diminished. It is commonly asserted that treaties
clearly be affected by how the signatories manage signed by a large number of countries accomplish
the resource. Signatories to the Antarctic treaty little of substance: 'The greater the number of
voted recently to allow mineral exploration, participants in the formulation of a treaty, the
despite appeals by non-signatories to designate weakeror more ambiguous its provisions arc likely to
Antarctica a nature reserve. be since they have toreflectcompromises making
them acceptable to every State involved' (Lyster,
In the above model, N was assumed to represent 1985, p. 4). This analysis suggests that the reason
both the number of countries that emit a (uniformly treaties signed by a large number of countries appear
mixed) pollutant into the environment and the to effect little additional abatement is not that the
number harmed as a consequence. However, for signatories are heterogeneous—although that may be
Table 1
Estimates of the Reduction in Percentage Ozone Depletion Effected by the Montreal Protocol
76
S. Barrett
ment and global welfare will be significantly better banned the use of CFCs in non-essential aerosols in
off, contrary to what the figures in Table 1 imply. the late 1970s, and yet other countries did not
What the model does suggest is that so many reciprocate.13 Unilateral restrictions on pelagic
countries would not have committed themselves to sealing in the North Pacific by the US were not
the agreement in the first place unless they already duplicated by Canada. We have also seen that
intended to take substantial unilateral action. In countries may wish to give in to their moral beliefs
other words, although the agreement itself may and embrace a less insular view of their responsi-
effect only little additional abatement, the very fact bilities. An important question is whether 'unsel-fish'
that so many countries have signed the agreement unilateral action can be expected to have a positive
suggests that the potential gains to co-operation influence on international negotiations. If one
were in this instance not very great country (or group of countries) abates more than the
Nash non-co-operative solution demands, and all
What does the model predict about the prospects of others choose the abatement levels that are optimal
an agreement being reached on global warming? N for them in anon-co-operative setting, will the
will again be large, and this will militate against environment be any better protected when inter-
national treaties are later negotiated?
We have already seen that such 'unselfish' unilat-eral It is important to note that the US and the European
actions need not be matched by other countries. The Community announced their intentions to phase out
United States, Canada, Sweden, and Norway production and consumption of the ozone-
1J
The analysis given here is by necessity over-simplified. For a more detailed analysis, see Barrett (1990).
" Reciprocity was certainly not full. The European Community, for example, passed two decisions limiting production
capacity of the so-called hard CFCs (CFC-11 and -12) and reducing their use in aerosols by 30 per cent.
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OXFORD REVIEW OF ECONOMIC POLICY, VOL. 6, NO. 1
depleting chemicals by the end of the century after col within the European Community. These
the Montreal Protocol came into force but before re- provi-sions will help increase the efficiency of
negotiation talks had started. It would be wrong, attaining the total emission reduction implicit in
however, to ascribe these developments simply to the agree-ment, although they almost certainly do
'unselfish' behaviour. After all, the world's largest not go far enough.
manufacturer of CFCs, US-based Du Pont, an-
nounced its intention to phase out production of
(iv) Side Payments
CFCs by the end of the century before the phase-out
decisions were taken by the US and EC. Three days The equilibrium in the model of international
after the EC decided to phase out CFCs, the chair- envi-ronmental agreements is determined by a
man of the leading European producer of CFCs, ICI, concept of stability that prohibits side payments.
declared that production of CFCs should cease Animpor-tant question is whether side payments
'as soon after 1998 as is practicable'. Much more is might effect a Pareto improvement. To investigate
at work here.14 this issue, reconsider the concept of stability
employed in the model. In equilibrium, non-
14
See Barrett (1990) for an analysis of these developments.
15 The United States and the UK continued to contribute to the Fund even after withdrawing their funding from UNESCO.
78
S. Barrett
they would not have signed it—but the poor coun-tries example, become increasingly clear that the suc-
may not have signed the Convention were it not for the cess of the Montreal Protocol will ultimately hinge
Fund. Though the Fund is small, the mechanism could on the accession of non-signatories to the Protocol,
prove instrumental in protecting many of the world's Concern has specially been voiced about the need to
remaining natural environ-ments, including the tropical get the poor countries—and, in particular, China
rain forests. and Indian—to sign the Protocol. These countries
have declared their need for financial assistance,
The World Heritage Convention is unique among and the issue of setting up a global fund for protect-
intemational environmental agreements for incor- ing the ozone layer is likely to dominate discussion
porating side payments. But the need for side payments at the next meeting of the Protocol's signatories. It
is not unique to the conservation of natural would seem to be something that cannot be avoided,
environments and wildlife. It has, for
79