Game Theory, Climate Change, Game Change
In Game Theory, climate change is a type of dilemma known as The Tragedy of the Commons. This is a many person version of a fundamental in game theory called the Prisoner’s Dilemma. Tragedy of the Commons problems’ deal with a shared resource. Each person will act in his own self-interest and collectively, over time, demand more from that resource than it can supply. This results in the degradation or destruction of that resource. Adam Smith’s statement that self-interested behavior maximizes the social good does not hold true in these instances.
A classic example is the cod fishery on the Grand Banks; for hundreds of years one of the most abundant and sustainable fisheries on earth. In the 1960’s, fishing techniques improved and fishermen could increase the size of their catch. The threat of overfishing existed and each fisherman could have maintained his previous quotas. Game theory predicts that each player will act in his self-interest and maximize his payoff. Each player will ask why should I take responsibility for the fishery when everyone else is not taking responsibility? What difference will my small contribution make to such a large resource? In the late 1980’s the fishery collapsed and all of those fishermen lost their livelihoods and identities. The fishery has not yet recovered.
In Tragedy of the Commons the payoff for taking responsibility is always lower than not taking responsibility because of extra expense or inconvenience. It can be framed as sacrifice versus profit. Those not taking responsibility are also known as free riders or shirkers. Collectively, the more players that take responsibility, the higher the payoff is for everyone. This is demonstrated in the CX Graph 1.
What solutions are available for a problem such as Climate Change? The typical remedies for these dilemmas are privatization of the resource and regulation. The shared resource in climate change is the atmosphere and no one can own the air. Carbon tax is a type of regulation meant to reduce the payoff of shirkers. Cap-and-trade is a regulation where some of the higher payoff of shirkers is given to those taking responsibility. Regulation on carbon emissions, at least in the United States seems unlikely in the current political environment. Since climate change is a global dilemma, global agreement and comprehensive enforcement are a challenge to regulation.
Another option is to raise the value of the payoff for taking responsibility. This would move the line of taking responsibility in CX Graph 1 to near the same level or above value of the payoff for shirkers and would change the outcome of the game or even change it to a different game.
Every player’s payoff is calculated according to what that player values. For some the payoff will be only monetary. For others, the value of the payoff could be increased by non-monetary means. By taking responsibility a company could reduce reputational risk, attract millennial customers and employees, and satisfy shareholders. For some individuals, there is value in the satisfaction of just doing the right thing. There will also be those who value not taking any action.
The approach of Carbon Xprint is to increase the payoff of taking responsibility. A player takes responsibility by making incremental investments in certified clean energy. The units of those investments are priced to match the cost of a ton of carbon. The player takes responsibility for one ton of carbon by investing in one unit of clean energy. It would be as simple as buying one CD for each ton of carbon. The capital would be used to create our clean energy infrastructure.
Unlike other approaches it does not decrease the payoff. It is not an expense but a savings: an investment, a reallocation of an asset, a portion of a 401K or a 529c, a company’s cash and investments, or a university’s endowment fund. Because it is an interest-bearing asset the monetary payoff of taking responsibility for an individual player is increased. These monies are put to work creating the capital improvements that are needed to solve climate change, and the payoff is increased for everyone. It can be used with or without regulation.
The cost of solar, energy storage, wind, and energy efficiency continue to decline. Clean energy investments and green bonds are paying very competitive rates. This method offers an opportunity to take measured responsibility for carbon emissions, one ton for one unit, often where no other options exist. It increases the payoff for taking responsibility. It incentivizes the self-interest of the players in the game toward a resolution that does not destroy the resource.