Coalition Formation in a Global Warming Game: How the Design of Protocols Affects the Success of Environmental Treaty-Making

We combine the newest concepts of non-cooperative coalition theory with a computable general equilibrium model close to the seminal RICE-model of Nordhaus and Yang (1996) to determine stable coalition structures in a global warming game. We consider three coalition games that allow for the formation of multiple coalitions. The coalition games represent different designs of climate treaty protocols. Counterintuitively, it turns out that treaties based on a unanimous decision rule and exclusive membership lead to superior outcomes than treaties with open membership. We also demonstrate that if coalition formation is not restricted to a single coalition, as this has been done previously in the literature, coalition structures with multiple coalitions will emerge in equilibrium. Most of the regional agreements are superior to single agreements. Moreover, our findings confirm those derived from simpler theoretical models that a cleverly designed transfer scheme can foster cooperation and that from the number of participants the success of a treaty cannot be inferred. They also support a conjecture of theory that in the case of greenhouse gases stable coalition structures (partial cooperation) can close the gap between the global optimum (full cooperation) and the Nash equilibrium (no cooperation) by a substantial amount. JEL-Classsification: C68, C72, H41, Q25