Endogenous Learning to Reduce Uncertainty in Climate Change: The Role of Knowledge Spillovers and the Degree of Cooperation in International Environmental Agreements

Francisco André, Michael Finus and Leyla Sayin
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Michael Finus: University of Bath
Leyla Sayin: University of Bath

No 66/17, Department of Economics Working Papers from University of Bath, Department of Economics

Abstract: One important obstacle to address climate change effectively is the global public bad nature of greenhouse gases. Another important difficulty is the existence of large uncertainties surrounding the relation between greenhouse gas emissions, temperature increase and the climate system. The international community tries to mitigate these uncertainties by means of research, both at the country and international level. Some recent studies have addressed the effects of uncertainty and learning on the formation of climate change agreements. However, they assume either an exogenous learning process or learning-by-doing. In contrast, we consider an endogenous process of learning-by-investment. In a three stage game, countries decide on membership in an agreement in the first stage, the level of investment in research in order to reduce the systematic risk of the damages of emissions in the second stage and the level of abatement in the third stage. We consider different cooperative scenarios in stage 2 and 3 (two versions of partial and one version of full cooperation) and different degrees of knowledge spillovers in terms of stable agreements and global welfare. We show that even though modesty in the form of partial cooperation may generate larger stable agreements, full cooperation tends to generate higher global welfare in equilibrium. Moreover, surprisingly, if countries cooperate on abatement, knowledge spillovers lead not to smaller but larger stable agreements with higher global welfare, suggesting that research output should be publicly available and not exclusive.

Date: 2017
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