Executive Summary
The Kyoto Protocol is due to expire in 2012. Conventional wisdom – especially among its fans – is
that without agreement on a successor treaty the world will spiral into ever-increasing emissions
and climate catastrophe will follow. New Energy Finance disagrees.
Analysis of climate change from a game-theoretical perspective reveals an Iterated Prisoner’s Dilemma. As Robert Axelrod demonstrated in the Evolution of Cooperation (1985), such games are frequently characterised by the evolution of cooperative behaviour, independent of strong central authority. And indeed this is what we are already seeing in climate negotiations, with countries and regions increasingly committing to unilateral action.
The optimum strategy for an Iterated Prisoner’s Dilemma is to be Nice, Retaliatory, Forgiving and Clear. This provides a framework for the evaluation of strategies to date, which shows that no country or region has so far adopted an optimal strategy. The US needs to start being Nice, Europe needs to learn to Retaliate, and the developing world needs to Forgive. All players bar Europe need to improve the Clarity with which they communicate their strategies.
The analysis also provides valuable insight into the optimal role of the UN. It should focus on its role as educator, coach and communications platform, rather than attempt to act as regulator and policeman. The UN should also find ways of breaking the negotiating process into smaller steps to encourage the emergence of sound national strategies.
For companies and investors, meanwhile, the lesson is that they should plan for a carbon-constrained future – irrespective of the outcome of upcoming negotiations.