Decision & Game Theory in Climate Change
The result of the current climate is a culmination of collective decisions of humanity. Therefore, the growing field of climate change decision and economics is no surprise. One of the most renowned researchers in this field, an economics nobel laureate, William Nordhaus, the mind behind the Dynamic Integrated Climate Economics (DICE) model, suggests from a decision theory perspective of policy structures in situ.
Decision theory can be understood with the most well-known analogy: the Prisoner’s Dilemma. Some well-known existing models apply, and the best solution for the dilemma has been found to be the tit-for-tat strategy (1). However, when involving multiple parties in large-scale policies, such as The Paris Agreement, it becomes harder to predict others’ behaviours and their outcomes, thus making it harder for individuals to decide on their actions for the future. With the current approach, from an economic perspective, maximizing the utility of individual and vested interests for shared resources such as the environment is the culmination of the current tragedy of commons we are witnessing.
Currently, the method of incentivizing in the Paris Agreement (PA) is to provide a “carrot” approach (through positive reinforcement for good decisions). However, Nordhaus suggests the development of a “Climate Club” focusing on penalties (a “stick” approach with negative reinforcement for bad decisions). According to Nordhaus, the positive reinforcement structure demonstrates that “International climate treaties, which attempt to address hard problems [...]have largely failed to meet their objectives”. His excellent suggestions from Foreign Affairs can be summarized as follows (4):
Learning from mistakes of the Kyoto Protocol.
Eliminating Free-riding.
Providing club membership benefits.
Sanctioning of non-participants.
Imposing negative externality solutions, such as tariffs, taxes and cap-and-trade.
Collaboration against anti-environmentalism and short-sighted interests.
From an environmental law perspective, further research in game theoretic models for climate change suggest traditional cost-benefit analysis is not effective to solve this issue on a global scale (5). Making smart decisions will lead to a smarter and more efficient climate action.
In localized communities, especially those struggling with demand and supply of common-pool resources, it is more economic for governments with infrastructural resources to apply their modelling and conduct research into these matters to test the parameters that benefit their environments the most. This data can be incorporated in providing climate action negotiations in policy making, utilizing predictive and mathematical modelling for optimal decisions. In a world of information, convincing with data is the most effective strategy to deal with climate change, which is estimated to be a trillion dollar problem. Thus, if the traditional methods are failing, and we are playing a sum-zero game on the losing side against our environment, a new tactic needs to be developed.
Cooperation is key to solving the climate change problem. Individuals alone cannot combat long lasting effects, but a collection of individuals can result in significant impact. One drop in the ocean doesn’t mean a lot, but many drops make the ocean.
Actions to be taken to improve these policies:
Develop multi-party mathematical decision and game theory models for effective climate policy actions focusing on individual party tailored incentives (instead of collective interests which encourage free-riding and underperformance). Many economic models for decision theory exist (6). Yet the most beneficial are yet to be tested for the climate.
Immediate effectiveness is required. It is suggested that earliest mitigation strategies are more effective, and stalling will leave dependency on geoengineering and adaptation which will reduce chances of cooperation between nations (7). Thus, penalties for late cooperation should be established as soon as possible.
Transform the climate change agreement problem from a “prisoner’s dilemma” to a “stag-hunt problem”, in which cooperation is the predominant strategy for decision making - although this is predicted to be the result of international policy in very later stages when there is not much left to preserve the environment (8). Thus, if we want to see effective results, transformation to this point before most of the environment is degraded (when there is no more point for mitigation and preservation measures) is absolutely crucial. Policies should center around majority cooperation, focusing on results sooner than later.
Please refer to these resources for better understanding of this topic:
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