We examined climate change negotiation in a game-theoretic framework. We formulated the international climate change negotiation as a coalition formation game and applied the equilibrium concept of ‘stable coalition’, under which no member has an incentive to leave the coalition (internally stable) and no non-member has an incentive to join the coalition (externally stable). The behavior of self-interested countries or groups of countries was analyzed with the application of global climate change simulation model, STACO, developed by Finus, Ierland and Dellink (2003).

The results of this study reaffirm the conclusion of most of previous research: Stable coalitions to address climate change are likely to be limited to a relatively small number of large regions representing at least 30% of global emissions. Our simulation results show there is no stable coalition structure without welfare transfers. Even with welfare transfers the stable coalitions are relatively small and typically include a mix of regions with low marginal emissions abatement costs and low marginal climate change damages and regions with high marginal emissions abatements costs and high marginal climate change damages. This phenomenon stems from the free-rider incentives inherent in public good problem. The free-rider incentive becomes stronger as the size of coalition increases. The burden-sharing rule can have a significant impact on the size and composition of the stable coalitions and hence on the share of the maximum potential gains from cooperation achieved.

Imperfect coop