Supranational climate-policy delegation

International agreements to fight global warming in the past often had limited success or failed altogether, such as the Copenhagen Summit in 2009. Against this background, there have been recurrent proposals by academic researchers, policy advisors, and political commentators to create a supranational climate protection authority with the explicit mandate to fight global warming, and to delegate decision power over certain climate-relevant policies once and for all to this authority. Their argument is that an independent authority can implement necessary but painful climate-policy reforms much better than elected politicians, who are often driven by myopic re-election concerns. The aim of the proposed project is to better understand whether this argument in favor of a supranational environmental authority is indeed valid. We plan to carefully study if and when it may be economically beneficial for countries to delegate climate-relevant policies, and how such delegation would affect international climate policies. The questions we are interested in include, but are not limited to, the following: Do countries face economic incentives to establish a supranational environmental authority? What mandate would be assigned to this authority in negotiations between several countries, which may be differently affected by global warming and act strategically? Would delegation allow to overcome some of the recurrent difficulties associated with international environmental agreements (non-compliance, re-negotiation, etc)? How is the feasibility and desirability of a supranational affected by the presence of risk and uncertainty? Can optimal policies be implemented by managing the aggregate supply of tradeable pollution permits and targeting their price, akin to a climate central bank? We plan to address these and other related questions within a theoretical economic model of climate policy. This model will be designed to capture the key trade-off between the economic benefits of energy consumption and environmental pollution costs, caused by the combustion of fossil fuel. These costs manifest themselves through local air pollution and global warming. The model will further allow for investments into clean technologies for energy production, such as windmills and solar panels, so that countries can avoid pollution but this is costly for them. The proposed project is the first to develop a theoretical model of supranational climate-policy delegation and ask whether an independent supranational environmental authority could alleviate the pressing problem of global warming. It thereby contributes to an important discussion on the design of socio-economic institutions to guarantee sustainability of economic policies for the years to come.

International coordination of climate protection policy makes sense, since individual countries take into account the local costs and benefits of their greenhouse gas emissions, but do not fully internalize the negative effects on other countries (caused by climate change). Nevertheless, international negotiations on climate protection very often do not produce results that are as ambitious as climate scientists consider necessary to limit global warming. One reason for this is the repeated temptation for politicians to postpone painful reforms into the future or to subsequent governments. Against this background, there have been increasing calls in recent years to set up a supranational institution and to transfer international climate protection policy to this institution. In this project, we show within a simple economic model that the establishment of a supranational climate protection institution can actually be desirable and politically possible, i.e. the individual countries benefit and have no incentive to act as free riders. In particular, a supranational institution is able to push through more ambitious climate protection policies than individual countries would agree to in repeated climate protection treaties. The ambition of the climate protection policy of a supranational institution (as well as its political enforceability) depends largely on which decisions are transferred to the institution. We consider two possible choices: caps on emissions and targets for investments in green technologies. In our model, it turns out that an institution that sets emission ceilings would pursue a more ambitious climate protection policy, but is politically more difficult to enforce than a (less ambitious) institution that sets investment targets for the countries. In both cases, however, the policy is more ambitious than the policy that would be negotiated directly between the politicians of individual countries within the framework of international climate agreements. The higher the stock of greenhouse gases in the atmosphere, the more difficult it becomes to successfully establish a supranational institution. The reason for this is that the policy of the supranational institution should be more ambitious, which increases the incentive for individual countries to act as free riders. In order to ensure the participation of the individual countries, the climate protection institution in our model has to allow more emissions than they actually consider optimal, which means that long-term economic welfare is lost. This is another example that postponing climate change reforms into the distant future can come with (potentially high) economic costs.