The Hindu Business Line : Climate change is essentially a bargaining problem

The rich decide how much they give, and the poor decide how much they get. And someone like the World Bank supervises the whole thing to see that the money is used for what a country said it would be used for.

THOMAS CROMBI SCHELLING, NOBEL-WINNING ECONOMIST

T. C. A. Srinivasa-Raghavan

The 88-year-old Nobel winning economist, Thomas Crombi Schelling, was in Delhi to give a lecture on issues in climate change at the invitation of the World Bank and ICRIER. Prof Schelling won the Nobel Prize for “having enhanced our understanding of conflict and cooperation through game theory analysis”.

He believes that the climate change problem is essentially a bargaining problem (as in game theory) and that it is solvable over time, provided the right institutional mechanisms are put in place. His book The Strategy of Conflict (1960) pioneered the study of bargaining and strategic behaviour. It is one of the most influential books of our time. He also believes that economics is not like engineering.

Sir, I must compliment you on choosing June to visit Delhi.

You think it is hot here? Try Washington.

Well, sir, Delhi or Washington, the globe is warming up. In India, we worry about who will pay for cooling it down. How do we reduce the carbon content of GDP? How do we change the energy base of the developing countries? How do they pay for clean technologies?

I wish that were the only problem. It is obvious that the rich countries have to pay for it. But it is also equally obvious that countries such as India and China are at risk from climate change. It will not matter much for the standard of living of the Americans or the Canadians.

But it will matter hugely to the developing world because so many depend on agriculture and the climate matters to them.

It is the developing world that is more vulnerable and which must worry because the people depend on forests, farming, fisheries, etc.

Worried we are, but also about who will pay for cleaning things up.

That is not the big problem. The big problem is that we don’t have a mechanism to decide which among the developed countries will pay how much.

And an even bigger problem is that there is no mechanism to decide which among the developing countries will receive how much. We need an institutional mechanism.

What about the technology fund?

It is not big enough. You need far more. You need a bigger fund that has to be paid for by the rich countries. But that is not enough. You need a way of deciding who will pay how much and who will get how much.

Isn’t the aid formula of 1 per cent of GDP good enough?

I think we need a more refined mechanism to determine the proportions. But the bigger problem, as I said, is of who will receive how much.

But that is surely the easier problem…

What makes you think it is easier? How will you and China agree on who should get how much?

Why should it be a quota system?

I didn’t say it is should be a quota system.

It could be linked to projects and the cost of their using clean technology.

Well, the amount that is likely to be available is likely to be less than what is needed. So we come back to the ‘who will get how much’ problem.

It could be dynamic, in the sense that each year the fund could be replenished.

But how will you decide who will get how much? That problem has to be solved. We don’t have institutions and mechanisms to decide. Kyoto didn’t settle that problem. In Copenhagen I hope they will decide who will reduce how much. But no one knows how all this is to be done.

So what should be done?

It makes more sense to focus on actions. Focusing on emissions will slow down the process because no one really knows how they will go.

You said focus on actions. Can we have a set of incentives that lead to those actions? You know, you say you will get so much if you do so much rather than you will get so much in order to do so much…

I don’t know if the best way is to do it the World Bank style. For example, if India could say we will do carbon sequestration, the World Bank could pay for the imported components.

But, then, the technology is not fully ready for it. You need a lot of geological exploration to see where in India you can inject carbon-dioxide into the earth and I don’t know if you have enough geologists in India to get that going.

Sir, if I may, we in India have dealt with these problems for a long time. We see it primarily as a refinance problem, and I would urge you to look at our Nabard. Theoretically, as well as practically, the problem of financing clean technologies by the West is practically identical to that of financing projects in agriculture. Only the scale would be larger and global.

I have to say I don’t know. I am not an expert on this. But my guess is that things like that will have to be done country by country. There cannot be one huge over-arching thing.

So there is no one-fits-all.

No, I am afraid not.

Do you see patents as a problem in getting to a new energy base? Is there any way that R&D can be subsidised by an international agency?

I should think so, yes. It needs to be done. But I don’t know how. If governments of the developing countries are going to finance so much of the research, I would hope that it is they who hold the patents. Or else, that cost would have to be taken into account in the transfer of resources.

Do you see this as a coordination problem, then? Multiple possible stable outcomes but how to pick the best Nash equilibrium, if you will?

My worry is that this is a diplomatic and not an optimisation problem. There is also going to be rivalry among the recipients. In the Marshall Plan, after the first year, the problem of who would get how much from the lumpsum was left to be decided by bargaining among the recipients.

They did put together what all they would do with the money first. They haggled a lot for 75 days but finally arrived at a solution.

So you see this as a bargaining problem.

Yes, I think we may need a procedure by which the big countries — not too many — form a group that can be told here’s how much you can expect, now go and agree on how you divide it among yourselves. That would be a healthy way of distributing the money.

The rich decide how much they give, and the poor decide — by negotiations among themselves — how much they get. And someone like the World Bank supervises the whole thing to see that the money is used for what a country said it would be used for.

Do you think there is going to be a huge inflation because of all this liquidity?

No, you don’t get inflation with so much unemployment. I could be wrong but I don’t think so.

Where do you see the future of economics as a subject?

I think what they are calling behavioural economics is, on the whole, pretty good stuff. I am a great believer in theory but we have to recognise the limitations of markets, competition and so on.

There can be huge departures from what is defined as rationality. So much depends on what people believe will happen. Economics is not like engineering.

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