Analyzing the Game of Climate Change

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What’s the problem?

Climate Change is a serious problem that needs to be addressed, lest we cause irreversible damages to the environment. From powerful hurricanes changing from “Once-in-a-thousand years” to “nearly every year,” and more extreme seasons, the effects are clear. Despite this, people refuse to accept the harm we’ve caused and fail to take any action to prevent further damage.

The reasons behind this scientific denial are complicated, but the simplest core reason is a fear of loss in economic prosperity if eco-friendly regulations are adopted. Forcing companies to limit their pollution output and purify all waste forces greater expenses on these companies, and therefore causes a drop in profit.

So what’s the solution?

Since economics is preventing people from adopting greener legislation, the solution is to create an economic incentive to be more eco-friendly. If international sanctions were enacted against countries refusing to abide by programs to reduce environmental impact, the financial aspect can create a different outcome. The situation can be approximated with the following normal-form matrix, a method of modeling “games” in game theory.

A Normal-Form Matrix of the Situation

As described, the country “playing” the game must decide whether they wish to agree to or reject the UN’s regulations. Additionally, the UN must decide if they will impost sanctions against any country rejecting the regulations, or do nothing. If the country agrees, they will suffer some loss in economic prosperity regardless of the UN’s decision. At the same time, the UN will have succeeded, “winning” the game of trying to force this country to agree.

However, if the country refuses the regulations, then the UN’s decision matters. If the UN chose to do nothing, then there is no positive or negative impact on either side, and nothing happens. However, if the UN chose to impose sanctions, then the country will suffer harsher economic penalties. Additionally, although the UN didn’t succeed in getting the country to adopt the economic regulations, they demonstrated their power, which will help push other countries towards agreeing to the regulations.

Now that we understand the model, let’s take a look at how it can show us the optimal outcome:

A “Movement Diagram” of the Model

Using a “movement diagram,” we can determine what each side would prefer in terms of outcome. Assuming the UN has decided to do nothing, the country would prefer to reject the regulations, giving it the best payoff. However, if the UN has decided to impose sanctions, the country would prefer to agree to the regulations, as now the highest available payoff is gained from that option. Additionally, the UN would have no preference of either option assuming the country agreed, as both outcomes are identical. However, if the country is going to reject the regulations, the UN would prefer to impose sanctions, giving it the best payoff. Therefore the UN should always choose to impose sanctions, as there is no benefit from picking the other strategy. This means that the strategy of doing nothing is “dominated,” meaning it is not viable.

Based on this, the UN will choose to impose sanctions against rejection of the regulations, and the country will in turn choose to agree to the regulations, as the economic penalty of the regulations is a better outcome than the economic penalty of the sanctions.

But how do we implement this?

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Luckily, we’re not the only ones looking at this. The UN is holding its Climate Action Summit on September 23rd, 2019. The purpose of this summit is described as:

To boost ambition and accelerate actions to implement the Paris Agreement

The Paris Agreement is the UN’s current standards for environmental improvement and environmental impact mitigation.

The solution appears to be simple enough – create an economic reason for countries to adopt the Paris Agreement – but the execution is complicated. However, if enough attention is drawn to this outcome, we could help push the focus of this summit towards creating such changes, enacting this solution.

What’s your take?

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  1. April 28, 2019 by Aria.Chang

    Hi Paxton,

    I also take econ and I absolutely loved your game theory analysis! While I understand that imposing sanctions, tariffs, regulations, etc, would help in the battle for climate change, have you researched the cost to human welfare that would come from this?

  2. May 01, 2019 by Shilpa H.

    Hey Paxton!
    Your project was very in-depth and interesting – it’s obvious how much effort you put into researching it. Although it primarily focuses on the United States, I encourage you to take at the Green New Deal project that’s being led by Alexandria Ocasio-Cortez. I think you might enjoy going through her approach. Your game theory analysis was thoughtful as well as captivating. Thank you for sharing!

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