Stable Ieas When Countries Choose Emission and Abatement Separately

The paper contributes to the literature that examines the formation of international environmental agreements as a two-stage game, where in the first, countries decide whether or not to sign the agreement, and in the second, they choose either emissions or abatement. When the second stage is modelled as a Nash equilibrium, only small coalitions are stable, while when modelled as a Stackelberg equilibrium, larger coalitions become stable but attain little welfare improvement, a result coined as the paradox of cooperation. In the present paper we allow countries to choose both emissions and abatement separately and we assume Stackelberg leadership in the second stage. Using general functional forms, we confirm the paradox of cooperation, avoiding breaking positivity constraints and offering clear explanation. When benefits from emissions and damages from global net emissions are substantial, the coalitions leadership advantage cannot overcome free-riding incentives if abatement costs are high, thus restricting the size of stable coalitions. Large coalitions become stable only when the cost of abatement decreases substantially, reducing free-riding incentives. However, the benefits they attain can also be reached by countries acting independently