Combatting Free-Rider Incentives: Ratcheting Found to Be Counterproductive
Research
The UN Climate Change Conference (COP25) in Madrid is in full swing. Its central goal: More ambitious climate commitments for a maximum number of states so as to increase the chances of meeting the 2015 Paris Agreement target of limiting global warming to a maximum of two degrees. One of the Paris Agreement’s key tools is a dynamic system of incentives called “ratcheting”. There are, however, doubts as to its effectiveness. As a laboratory experiment by researchers from ZEW Mannheim and the Leipzig University of Applied Sciences (HTWK Leipzig) shows, this system of incentives could even prove counterproductive.
“Instead of relying on ratcheting, the COP25 should be used as an opportunity to advance measures to counteract free-rider incentives. These include options such as internationally coordinated CO2 pricing and its formalisation in appropriate trade agreements,” says Professor Martin Kesternich, deputy head of the ZEW Research Department “Environmental and Resource Economics, Environmental Management”.
In order to limit global warming, substantial contributions to climate protection are indispensable. One key measure in this regard is the system known as “ratcheting”. The term refers to a dynamic system of incentives which requires signatory states to provide insight into their national climate protection contributions on a regular basis, and to step up these efforts over time. Whether and how ratcheting is effective is the subject of a study by researchers from ZEW Mannheim and HTWK Leipzig. Their findings can be obtained from a recent ZEW policy brief. In order to assess the effects of ratcheting, the ideal approach would be to compare two worlds: a world in which states use ratcheting to make climate protection contributions, and one in which they do so without ratcheting. Yet in the absence of such a second world, the researchers resorted to a laboratory experiment. This experiment consists of a public goods game with monetary incentives to reflect the key characteristics pertaining to the problem of cooperation in international climate policy. The results are sobering.
Climate policymakers ought to step up their efforts to combat free-rider incentives
The experiment shows that ratcheting causes especially those players who initially display cooperative behaviour and comparatively ambitious climate goals to downsize their ambitions. This significantly decreases the level of both climate protection and effectiveness. “It seems that this kind of behaviour is grounded in the cooperative players’ fear that ‘free riders’ might exploit their high propensity to deliver on climate protection, a risk they seek to prevent,” says ZEW Research Associate Professor Bodo Sturm from HTKW Leipzig. As time progresses, ratcheting does indeed increase participants’ willingness to cooperate in order to meet the two degree target. Yet this is not sufficient to compensate for their reduced commitment observed at the beginning. In this way, ratcheting might even counteract its intended effect.
What does this mean for international climate policy? The assertion that ratcheting has a positive impact on real-world contributions to the reduction of CO2 emissions should be met with great scepticism. There is neither theoretical nor empirical evidence that ratcheting mitigates or even solves the cooperation problem. Rather than simply introducing ratcheting and trusting, as was done with the Paris Agreement, that an ‘automatic’ increase in climate protection contributions will ensue, climate policymakers should take more decisive steps to combat free-rider incentives, according to the researchers. A promising tool to this end could be to raise CO2 prices in all cooperatives states. This would have to be followed by giving cooperative states the possibility to impose CO2 tariffs on imports from states that refuse to participate in the CO2 pricing scheme. Any further steps in this direction would be a great accomplishment for the COP25.