Author(s): Andrew Dara Or
Mentor(s): Moon Joon Kim, Economics, Mason Korea
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Abstract
International pollution policy consistently fails to achieve meaningful emissions reductions, not because states lack environmental concern, but because the strategic structure of global cooperation rewards defection. This project applies game-theoretic analysis to explain why voluntary climate agreements break down and identifies the mathematical conditions under which cooperation becomes rational. Using a formal payoff model, I show that a country will only cooperate when the sum of sanctions and its discounted share of global climate benefits exceeds the domestic costs of mitigation and the gains from cheating:
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≥
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s+αPV(B)≥c+g.
A key finding is that the Social Discount Rate (SDR) plays a decisive role in shaping this inequality. Higher SDRs sharply reduce the present value of future climate benefits, making defection the dominant strategy. Real-world policy behavior in the United States aligns with this model: high SDRs corresponded with withdrawal from the Paris Agreement, while lower SDRs accompanied renewed cooperation.
Case studies of the Montreal Protocol and Paris Agreement demonstrate that successful treaties alter incentives through sanctions, financing, and monitoring. The analysis also incorporates recent evidence linking pollution to declining political participation, revealing a feedback loop that undermines enforcement. Collectively, these results highlight the need to redesign treaty incentives, lower discount rates, and reduce free-rider gains to enable durable climate cooperation.
Audio Transcript
Hello, my name is Andrew Or. I am a junior economics major at George Mason University, and for my USRP project. I will be presenting game theory analysis of an international pollution policy. My research question is why do global pollution agreements so often fail and how can game theory help us design policies that may actually succeed? Although climate change is usually described as an environmental or scientific problem, at the international level, it is fundamentally a strategic problem. Every country benefits when global emissions fall, but the cost of reducing those emissions are domestic, immediate, and politically painful. This misalignment between national incentives and global welfare explained why international cooperation has been so fragile and why so many treaties fail to produce real emission deductions. Game theory provides a powerful framework for mostly the incentive structure that drives state behavior and for identifying the policies needed to shift the equilibrium towards cooperation. Pollution mitigation is a global public good. It is non-excludable, and it’s non-rival, because benefits are shared globally while costs are paid individually. States based a strong incentive to free ride. This is the core collective failure in global climate politics. Clever negotiations resemble a repeated prisoner’s dilemma. If both countries collaborate, the world achieves the best outcome. However, if each country gains by defecting while the other cooperates, and mutual defection becomes a stable equilibrium. This is why voluntary agreements without enforcement consistently underperform. The payoff matrix illustrate this problem. Cooperation requires immediate national cost, defection, offers short-term economic gains, cheaper energy, and competitive advantage. Because of benefits of reduced pollution are long term and global, individual states rarely find cooperations rational to their own. This structure creates bias towards defection. The key variable to achieving cooperation is social discount rate. In the United States during Trump’s 1st term, the social discount rate was from 3 to 7%, while during the Biden administration, the rate range from 2.5 to 5%. From a 2023 article by BRG, the recommended SDRs by economist is 2 to 3%. For environmental decisions because higher rates undervalue future climate stability. Under the higher Trump SDR, the U.S. withdrew from the Paris agreement, halted green climate fund contributions and scaled back multilateral climate commitments. This behavior is fully consistent with the cooperation condition where high SDR equals lower PVB and defection becomes rational. Under Biden administration, the US rejoined the Paris agreement, resume GCF contributions, and renewed climate diplomacy. Cooperation become more rational, once future benefits were valued appropriately. The 2 main case studies I chose to observe were the Montreal Protocol and the Paris agreement. The Montreal Protocol is the clearest example of a successful treaty because it altered the payoff structure. Severe trade sanctions raise the cost of defection, the multilateral fund reduced the cost of compliance for developing states, and strict verification, reduced cheating gains, or free rider problems. Countries including the US, China, and India had strong incentives to comply because the treaty satisfied these conditions. The Paris agreement, on the other hand, lacked sanctions, binding targets, hard monitoring, or enforcement mechanisms, and major emitters have expanded coal use or failed to meet pledges because of this. I generated model that will help represent this in action, and these are the variables I will use for clarification. The payoff from cooperating is the present value of long-term global climate benefit minus the domestic cost of mitigation. And the payoff from defecting is the cheating gains or free rider gains minus the sanctions for defection. A state only has incentives to cooperate if C is greater than or equal to D. Based on the information from the US, I created a mock graph to help better represent this model. Defection is the predicted equilibrium, not a political accident. Cooperation emerges only when treaty shipped incentives, high SDRs mathematically erase long-term climate benefits, U.S. withdrawal and reentry match the model’s predictions, successful treaties share sanctions, financing, and verification mechanisms. Game theory shows that international pollution policy does not fail because states are rational, it fails because strategic architecture rewards defection, to make cooperation rational, we must reshape the payoff matrix. There are 3 clear solutions. One is to raise sanctions and increase S, 2 is to reduce the free rider incentives by reducing G, and 3 is to reform discount rate policy lowering R. Evidently, this research is not finished as there is many more variables to explore. I would like to express my sincere gratification to the USP for provide me with the opportunity to present and further my research, and I’m also grateful for my mentor, Professor Moonjun Kim, for his guidance and support through the project.