Belfer Center, Kennedy School, Harvard Univ. / by Bard Harstad
Recent research in economics shows how not to design climate treaties—and suggests how to get it right.
The UN approach to climate negotiations is to focus on emission reduction. It is well recognized that research and development (R&D) and new green technology will be essential, but the investment choices are and will be left to sovereign countries.
The caveat with this approach is the so-called hold-up problem in economics: After a country has invested in green technology, it will be requested to cut emissions more, because, when technology investments have already been made, it is both efficient and fair that the deepest cuts are made in the country where cuts are least expensive.1
Countries thus have little incentive to invest in green technologies if yet another round of climate negotiations is coming up. In fact, if the duration of the commitment period is just a few years, then green investments can be lower in the presence of climate agreements than they would have been in their absence. For this reason, countries can actually be worse off with treaties of short duration than with no treaties at all…