Global Carbon Mitigation if President Trump Walks Out on the COP21

Suppose that all 7.5 billion people on the planet achieve the “American Dream” and buy a car that achieves 25 MP G and each drives 10,000 miles per year.  The “Paul Ehrlich/Jared Diamond” arithmetic show that the carbon footprint caused by this privately enjoyable consumption would be proportional to burning 3 trillion gallons of gasoline a year.

Such large numbers immediately highlight the importance of collective action in mitigating this ugly Tragedy of the Commons.  So, this is why the news is filled with stories saying “Trump Will Free Ride and Not Honor President Obama’s promises”.   Let’s step back for a moment.  First, the Paris COP 21 had no enforcement mechanisms.  Second, most of the LDCs set goals relative to vague business as usual scenarios.  Recall what a BAU is.  Suppose I weigh 200 pounds and I say that I will go on a diet such that at the end of the year I will weigh 10% less than my “business as usual scenario”.    A naive reader would say;  ”great, that means that you will weigh 180 by the end of the year”.   That is false because I haven’t told you what my BAU will be.  Suppose I say that my BAU is to gain 20% each year so ,  my 10% diet reduction really means that I will weigh 200*1.2*.9 at the end of the year = 216 pounds.

If the USA walks out from “the deal”, what happens next? Is the U.S the key to the galaxy in the year 2017?  Yes, there are multiple equilibria to this complex bargaining game, but here is my prediction.  Different nations will make different bets on the green economy. Elon Musk and Telsa will press ahead on its projects. A competition is taking place all over the world to build the green economy. Yes, a price on carbon would accelerate this progress but by how much?  The induced innovation economists have not written a convincing paper measuring how the uncertainty associated with political business cycles (i.e that Hilary Clinton would have remained in COP 21) affects the green tech investment option.  In a world of irreversible investment under uncertainty, this political risk should lead investment to freeze up. But will it?

I believe that the U.S action (which I do not support) will have a minor impact on global green innovation and thus the current headlines are over-played.  U.S journalists want to see the U.S as the key to the world’s future.  We are entering a new period where we must be more modest about our role on this planet.  The U.S is a great nation but it is a small nation in a big world.

Ideas are public goods, let’s have a competition to discover them and to help them to diffuse across borders.  If there is sufficient demand for the green economy, then the induced innovation hypothesis predicts that suppliers will step up independent of U.S policy.   Pessimists must argue that China’s green push is only taking place because it thinks that the U.S will make this push. Strategic entry games from IO would make a different prediction.  Enter markets where your rivals aren’t entering (unless you believe they have superior information about future demand conditions and thus you learn from observing their choice).