International Environmental Agreements: The Case of Costly Monetary Transfers

Most existing international environmental agreements to resolve transboundary pollution problems appear constrained in the sense that either monetary transfers accompany uniform abatement standards (agreements based on a uniform standard with monetary transfers), or differentiated abatement standards are established, but without monetary transfers (agreements based on differentiated standards). For two asymmetric countries facing the challenge of a transboundary pollution problem, we compare the relative efficiency of these two second-best agreements. We study especially the role of the costs associated with transfer payments across countries in the choice of these agreements. To conduct this analysis, we use a negotiation game and the generalized Nash bargaining solution (Nash in Econometrica 21: 128-140, 1953) as the equilibrium. For total welfare, our findings show that countries collectively prefer the uniform to the differentiated agreement if the cost of transfers is sufficiently low compared to the ratio for countries of the difference of the abatement costs between the two agreements. In the analysis of individual welfare, we also discuss the reluctance of one country to sign a specific type of agreement even if it is better off than in the case of non-cooperation.