The impact of abatement technology difference on optimal allowance trading scheme under the stability of international environmental agreement

Abstract

The unrelenting surge in global warming in the current era requires the inevitable needs for international cooperation to mitigate the escalating carbon emissions. While theoretical researches have examined potential frameworks as to an international environmental agreement (IEA) to mitigate global warming problem, none considered the impact of asymmetric technology difference on the optimal allowance trading scheme when forming a stable IEA. By using the method of participation game theory and numerical simulations, this paper envisages a set of countries with asymmetric abatement technology in a noncooperative participation game to study the various impacts of the magnitude of technology difference among countries, the scope of the “allowances to emit” trading, the decision orders and the number of total countries on the optimal trading scheme under the stability of IEA. It characterizes three trading scenarios in a participation game and analyzes in detail that the magnitude of technology difference and the coverage of trading system have impacts on the optimal coalition size as well as the feature of coalition member. The quantitative findings show that if the technology gap is sufficiently small/large, the largest/smallest abatement achieves under a worldwide trading system instead of a trading system within the IEA members. From the perspective of social welfare, the upshot of optimal IEA size as well as trading scheme is provided upon the magnitude of technology difference. In sum, a comprehensive global environmental convention with a worldwide “allowances to emit” trading system is overarching and optimal for the global society. These findings drive towards some key policy implications that establish a sound trading scheme allowing fair participation for all countries and encourage innovation activities in abatement technologies and so on.