A Climate Alliance through Transfer: Transfer Design in an Economic Conflict Model

Abstract

For decades, combating climate change has been a global challenge, which requires jointly coordinated efforts by numerous, international actors. However, it has been shown time and again that agreeing on globally binding agreements without a global government proves difficult. To this end, this paper examines the possibility of a tolerance premium. This means a transfer payment in exchange for accepting and complying with the associated agreement. The provider of this tolerance premium determines the conditions of its payment to set desired incentives. Thus, collective decision making can also be self-enforced without a higher authority. This scenario is studied analytically based on Dixit’s conflict model. The study shows that the optimal tolerance premium depends only on the value of the prize to the transferee and that this can result in a stalling of the conflict. The implications of this model shed light on the design of global climate agreements that are self-enforcing without the need for a global government. For this purpose, the upfront payment of funds and their reimbursement as a tolerance premium serve as an incentive to comply with collectively agreed rules in climate policy.