Climate Policy, Irreversibilities and Global Economic Shocks

Global systematic economic shocks may affect the Nash equilibrium contributions to international climate mitigation. We study how this effect depends on the flexibility countries have to adjust to these shocks. The kind of rigidities countries face because of technological irreversibilities plays a crucial role. Under the plausible assumption of “prudence,†higher global uncertainty tends to reduce equilibrium climate contributions if irreversibilities in the level of climate policy choices exist. And, if countries are committed to allocating a proportion of income to climate protection, rigidities may increase welfare. Thus, exercising the option to perfectly adjust one’s contributions to shocks may be another form of free riding.