International climate policy: a “second best” solution for a “second best” world?

In the current political environment, it is highly unlikely that all countries will agree to take on immediate commitments to reduce their greenhouse gas emissions. In particular, developing countries will look to their wealthier neighbors to be the “first movers.” In this paper, we assume that developing countries will eventually accede to an international emission reductions regime under two alternative scenarios. In the first, the decision on the part of developing countries to join the coalition is not made until just before accession. There is no planning to reconfigure their capital stock in advance of joining the coalition. In the second, we assume that developing countries commit to prespecified reductions beginning at an agreed upon date in the future; that is, they anticipate accession. We find that with an agreement now to future reductions, developing countries will modify their technology investment decisions in advance of accession to avoid being saddled with costly stranded assets, substantially reducing their GDP losses. Developed countries also benefit from not having to make as drastic reductions in the near-term to preserve the feasibility of stringent stabilization goals.