Why Reducing U.S. Carbon Dioxide Emissions Is a Risky Move in a Global Economy

Will China and the rest of the world follow our lead or take a free ride?


Coal Plant

On Monday, the Environmental Protection Agency unveiled a proposal that would require America's electrical power generation industry to cut its carbon dioxide emissions by 30 percent below their 2005 levels by 2030. Everyone agrees that by themselves, these reductions would have an insignificant effect on global warming. Indeed, using an uncontroversial computer model, climatologist Paul Knappenberger has calculated that eliminating all U.S. carbon dioxide emissions immediately would reduce global average temperatures by only about -0.08°C by 2050.

So why does the White House want these cuts? In his May 28 speech to the cadets at the U.S. Military Academy at West Point, President Obama pledged that he would in the next year "make sure America is out front in putting together a global framework to preserve our planet." He added that "American influence is always stronger when we lead by example. We can't exempt ourselves from the rules that apply to everybody else." And where does the president want our example to lead? To 2015's big U.N. climate change conference in Paris, where the world is supposed to hammer out an agreement to limit greenhouse gas emissions to levels that would keep the world from warming by more than 2° Celsius.

The administration's plan has garnered accolades around the world. Connie Hedegaard, the European Union's commissioner for climate action, has praised the proposal, declaring that it "shows that the United States is taking climate change seriously" and "sends a positive signal ahead of the Paris conference." The U.N.'s top climate change bureaucrat, Christiana Figueres, has said the plan "will send a good signal to nations everywhere that one of the world's biggest emitters is taking the future of the planet and its people seriously." In an op-ed for the Financial Times, U.S. Secretary of State John Kerry asserts that the United States "is setting a responsible example." And with an "ambitious global agreement in Paris" pending, he writes, "We will need leaders and people around the world to do the same." As The Week's Ryan Cooper puts it, these rules are supposed to let the U.S. "go into new negotiations with a nice fat emissions reduction to demonstrate commitment and good faith." 

Will other countries follow Washington's lead and cut their own carbon dioxide emissions? Game theory suggests some clues.

International climate negotiations are somewhat similar to the prisoner's dilemma. Assuming man-made global warming is costly to all countries, the optimum solution is for all countries to cut their greenhouse gas emissions. But for an individual country, the better option is to keep burning low-cost fossil fuels while other nations reduce their emissions. Since all countries recognize that other countries are likely to cheat and continue to use fossil fuels, they all fail to cut their emissions.

Is there a way out of that dynamic? Two political scientists, Scott Barrett of Columbia and Astrid Dannenberg of Princeton, tried to find one in a 2013 study using game theory experiments. They concluded that if game players know for sure where the threshold for huge losses is located, they will cooperate to avoid it. The catastrophe threshold acts a form of punishment that encourages cooperation.

The experiments involved games in which the players knew crossing a certain threshold spelled disaster for their winnings. Given this certain knowledge, the vast majority players made and kept their promises about their contributions to the general pot, and they avoided crossing the disaster threshold in eight out of 10 games. But when the threshold for catastrophe was even slightly indeterminate, the players crossed essentially every time. 

The current uncertainties about the effects and intensity of future climate change suggest that countries are unlikely to follow the Obama administration's lead. Based on their experimental results, Barrett and Dannenberg hold out the hope that climate research that reduces threshold uncertainty might help spur countries into mutual cuts of their greenhouse gas emissions.

In another 2013 study, Gunnar Eskeland of the Norwegian School of Economics tried to figure out whether there is a case for early, unilateral, unconditional emissions reductions. He concludes that small countries whose emissions won't make much of a difference to eventual global warming might act as climate leaders by cutting their emissions.

Why small countries? If a big country with lots of emissions were unilaterally to cut first, Eskeland explains, other big emitting countries would likely succumb to the temptation to free ride. The first country's cuts would delay any deleterious effects of global warming for other countries, and the countries that declined to cut their emissions would also be able to take advantage of even cheaper fossil fuels.

The lower global price for fossil fuels is called "carbon leakage"; it results from the fact that the first mover country has cut its demand. Under the administration's new plan, in fact, domestic cuts in coal demand will likely mean more shipments of cheap American coal abroad. As Darek Urbaniak, the energy policy officer at WWF Europe, has warned, "This cheap coal and associated CO2 emissions may find its way to the EU and other countries set on using coal for power generation" unless European politicians adopt policies like America's.

Eskeland has described exactly the situation in which the planet's two biggest emitters of carbon dioxide, the United States and China, find themselves. Nevertheless, President Obama is proceeding with unilateral emissions cut. We will soon see if China and other countries will elect to free ride.

Two Washington State University economists, Ana Espinola-Arredondo and Felix Munoz-Garcia, observe in a 2010 study that efforts to free ride are pervasive in negotiating international environmental agreements. Among other findings, countries sign international environmental agreements only when the costs of failing to comply are low. Think in this context of Canada and Japan, both of which ratified the greenhouse gas emission cuts under the Kyoto Protocol and then basically ignored their commitments. Espinola-Arredondo and Munoz-Garcia further predict that when countries make high commitment proposals predicated on other countries agreeing to them, no country will act. They point out, for example, that the European Union promised to cut its emissions steeply by 2020 if other countries would too. No other country responded to this European initiative by matching its proposed cuts.

In a 2011 working paper for the National Bureau of Economic Research, two economists—Geoffrey Heal of Columbia and Howard Kunreuther of the University of Pennsylvania—explore the idea that there may be tipping points in climate negotiations. The notion is that once enough countries have joined a climate agreement, other countries will quickly do so. But how many are enough?

To illustrate how tipping points might work with climate policies, Heal and Kunreuther discuss the way the world phased out unleaded gasoline and the ozone-depleting chlorofluorocarbons (CFCs) coolants used in air conditioners.

The United States moved first to phase out leaded gasoline. Given the size and dominance of the American automobile market, other countries and their automakers had an economic incentive to follow suit. This was made easier by the fact that America's companies had already paid the fixed costs involved in developing lead-free technologies.

Similarly, the phase-out of CFCs, negotiated in the Montreal Protocol of 1987, was made feasible when an American company developed a good substitute for those chemicals. In addition, rich countries agreed to cover some of the costs for poor countries to replace CFCs. Note that both of these phase-out tipping points were reached only when adequate new technologies were developed to replace the banned substances.

Heal and Kunreuther suggest that a similar tipping point might be reached when the right set of countries agree to begin reducing their greenhouse gas emissions. Noting that the European Union's limits on greenhouse gas emissions clearly have not tipped the rest of the world into emulating Europe's climate policies, they suggest that China is the key, because other countries fear that their carbon-intensive industries will move there unless China also sets limits on its emissions. And if both China and the United States agree to limit their greenhouse emissions, Heal and Kunreuther argue, that would likely trigger a movement by most other countries to do the same—especially if border adjustment tariffs could be imposed on goods from the nations who don't join in.

"The assertion by the administration," one former Environmental Protection Agency official tells The Washington Post," is that by showing leadership, we will persuade other countries to come to the table and do aggressive things on their own." He adds, "I think that remains to be seen." Indeed it does.