How Cooperation and Competition Arise in Regional Climate Policies: RICE as a Dynamic Game

TL;DR

This paper models the RICE climate-economy framework as a dynamic game, analyzing cooperative and non-cooperative solutions to understand regional climate policy interactions and their implications for international negotiations.

Contribution

It introduces a game-theoretic analysis of the RICE model, proposing new algorithms for cooperative and non-cooperative solutions, and provides open-source implementations.

Findings

Cooperation leads to global social welfare maximization.

Non-cooperative solutions converge to Nash equilibrium.

Algorithms facilitate understanding of regional climate policy dynamics.

Abstract

One of the most widely used models for studying the geographical economics of climate change is the Regional Integrated model of Climate and the Economy (RICE). In this paper, we investigate how cooperation and competition arise in regional climate policies under the RICE framework from the standpoints of game theory and optimal control. First, we show that the RICE model is inherently a dynamic game. Second, we study both cooperative and non-cooperative solutions to this RICE dynamic game. In cooperative settings, we investigate the global social welfare equilibrium that maximizes the weighted and cumulative social welfare across regions. We next divide the regions into two clusters: developed and developing, and look at the social welfare frontier under the notion of Pareto optimality. We also present a receding horizon approach to approximate the global social welfare equilibrium for robustness and computational efficiency. For non-cooperative settings, we study best-response dynamics and open-loop Nash equilibrium of the RICE game. A Recursive Best-response Algorithm for Dynamic Games (RBA-DG) is proposed to describe the sequences of best-response decisions for dynamic games, which indicates convergence to open-loop Nash equilibrium when applied to the RICE game by numerical studies. We also study online receding horizon feedback decisions of the RICE game. A Receding Horizon Feedback Algorithm for Dynamic Games (RHFA-DG) is proposed. All these proposed solution concepts are implemented and open sourced using the latest updated parameters and data. The results reveal how game theory may be used to facilitate international negotiations towards consensus on regional climate-change mitigation policies, as well as how cooperative and competitive regional relations shape climate change for our future.