Towards a general theory of environmental treaties

by MacDonald, Ian

In the face of transboundary pollution externaiities. cooperation in regdatory efforts between countries is required to move the economy to thc optimal outcome. Existing research in this field concludes that such cooperation is unlikely to occur because of the free-rider problern. This paper introduces the institution of international treaties and siiows that a cooperative outcome supported by a treaty is sustainable. A key component of the treaty institutions employed in this paper is the fact that a treaty limits the actions of signatories only if al1 countries sign it. With symmetry between countries. a t rcaty outconie that can be obtained. cdled an unconstrained cost-benefit optimal treaty. involves al1 countries signing the treaty and controliing pollution optimally. Mihen =ymiiictries arc added to the model. sorrie countries may not be made bettcr off by entering irito thc unconstrained cost-benefit optimal treaty arrangcment. However. it is possible to modify tlie treaty institution to ensure that al1 countries are individually better off iii tliv treatp outconie than in the non-cooperative equilibrium. thereby ensuring that cooperation is supportable. One such treaty requires countries to reduce their pollution levcls b~. a common pcrcentage from the non-cooperative benchmark level. Under such a treaty arrangement. welfare iniprovements are generally significant. Introducing tradablc discharge perniits to this type of treaty is aIso effective in increasing both individual aiid total welfarc in the economy when asymmctries across countries are present. Tfic trcaty franieu-ork is then applied to the Moritreal Protocol for chlorofluorocarbons. tlic Kyoto agreement for gec~ihousc gases. and Convention on International Trade iii E~idangcred Specics.