Environmental consciousness and moral hazard in international agreements to protect the environment: A note

Petrakis and Xepapadeas (1996) proposed a system of self-financed transfers to expand the number of countries that sign an international environmental agreement. They also suggested a mechanism that detects cheating in those agreements when the emissions of an individual country cannot be observed by other countries. We show that this mechanism can easily be exploited if some environmentally less conscious countries collude. We propose a system of transfers which is sufficient to rule out such behaviour. It is demonstrated that side payments should be higher than those suggested by Petrakis and Xepapadeas if countries differ considerably in their environmental consciousness. Moreover, it is less likely that a system of self-financed transfers exists.