The Obama administration announced a climate agreement with China last week, which was immediately criticized as giving away the store. However, this climate agreement may be a turning point.
As I wrote three years ago, and international climate negotiations are, above all, a game-theoretic process. For an international climate agreement to be durable, there must be sufficient confidence on the part of all parties that all of the other parties are committed to mitigation of greenhouse gas emissions. For any individual country, it is likely that the benefits of mitigating greenhouse gas emissions are much greater than the costs. However, this is predicated on other countries also performing their own self-interested cost-benefit analysis and arriving at the same conclusion. It is a fragile agreement indeed, when there are numerous parties, all of which must trust that all of the other parties will reach the same conclusion and will refrain from free-riding. Ironically, a country that makes great strides in mitigation or geo-engineering may actually undermine cooperation, as this would sow doubt among potential partners that such a country may reach the conclusion that given plausible alternatives, the benefits of reducing greenhouse gases may not exceed the costs. In an environment of such fragile cooperation, signaling is extremely important. This US – China deal may just be the strongest signal yet that the two largest emitters in the world recognize that the benefits of climate policy exceed the costs.