Some Implications of Increased Cooperation in World Oil Conservation - Economic Review, Second Quarter, 1998 - Dallas Fed

The classic problem of free riding arises when nations act to curtail emissions of carbon dioxide (CO2) and other potential greenhouse gases. When damages from emissions are global rather than local, countries that do not participate in policies directed at reducing global climate change receive the benefits of other countries’ actions without incurring the costs. Past research and game-theoretic analyses have emphasized the gains from eliciting the cooperation of developing countries in an effort to limit global CO2 emissions (Bohm 1993; Brown and Huntington 1994b; Eyckmans, Proost, and Schokkaert 1993; Hoel 1991b and 1994; Manne and Rutherford 1994; and Welsch 1995). Broader participation reduces the costs of achieving any given target of emissions reductions among those nations engaged in the coordinated policies. In essence, the cost curve for countries reducing their emissions shifts downward as participation expands to include more countries. Recent estimates of possible climatechange damages allow us to examine the impact of cooperation on the optimal strategy for reducing CO2 emissions. Because increased participation lowers the costs of coordinated policies to reduce emissions, it is likely to increase the amount of conservation that the participants would see as cost effective for any given set of estimates of the benefits of reducing emissions and avoiding environmental damage. Whether increased cooperation yields too little or too great a reduction in emissions from a world perspective depends critically upon the level of damage estimates—an empirical issue that at the moment is highly uncertain. Reduced usage of fossil fuels, through higher efficiency equipment and changing economic structures and lifestyles, is the principal vehicle for CO2 emissions abatement. Policies that discourage the use of coal, oil, and, to a lesser extent, natural gas contribute to reduced emissions of greenhouse gases and hence lower the potential damages from climate change. Analysis of abatement policies affecting the oil market can seem complex, because actions taken by one country or group of countries are likely to influence oil consumption in other parts of the world through their effect on the world oil price. In this article, we evaluate the extent to which increasing cooperation beyond the Organization for Economic Cooperation and Development (OECD) to limit CO2 emissions through oil conservation is desirable from a world perspective. To accomplish this task, we Some Implications of Increased Cooperation in World Oil Conservation