However, even though it’s been widely agreed by the scientific community that climate change is a direct result of carbon emissions, and that if we can reduce these emissions we can help prevent the approaching crisis, making progress toward achieving this has still proven challenging.
Why is this the case, and could ‘game theory’ provide the answer…?
The Prisoner’s Dilemma
In 1950 a think tank analysing game theory were interested to note that while participating in a game together two completely rational individuals might not cooperate, even if it appeared that to do so would ultimately be in their best interests. This observation, and the theory behind it, came to be identified as ‘The Prisoner’s Dilemma’.
A simple example of ‘The Prisoner’s Dilemma’ in action would be this:
- Suspect A and Suspect B are both arrested for a minor crime. The standard sentence for this crime is 3 years.
- However, the police believe that Suspect A and Suspect B are also responsible for a separate major crime. The standard sentence for this greater crime is 10 years. Unfortunately, the police have no conclusive proof, and to convict either suspect of the major crime they require one (or both) of the suspects to testify against the other.
- To encourage the suspects to testify against one another, both Suspect A and Suspect B are informed that in return for their testimony they will receive a reduced sentence.
- The two suspects are kept separate and neither one knows what the other will choose to do; remain silent, or testify.
In this scenario, the socially optimal solution for the Suspects would be to support (a.k.a. ‘co-operate’) with each other. By looking out for one other, collectively they serve the lowest sentence.
However, from an individual perspective the Suspects are rationally not compelled to do so. Here’s how the problem looks from a Suspect’s point-of-view:
- Suspect A does not know what Suspect B will do.
- What Suspect A does know is that if Suspect B testifies, Suspect A will serve a maximum sentence of 10 years. If Suspect A chooses to testify as well, this sentence will be reduced. I.e. Suspect A is incentivised to testify, assuming Suspect B does too.
- If, on the other hand, Suspect B does not testify, Suspect A will serve a maximum sentence of 3 years. However, if Suspect A chooses to testify this sentence will again be reduced. I.e. Suspect A is still incentivised to testify, even assuming Suspect B does not.
Assuming both suspects act rationally, both will testify and collectively serve a worse sentence.
‘The Prisoner’s Dilemma’ demonstrates that reaching an optimal solution requires, unfortunately, ‘irrational’ behaviour.
How does this apply to carbon emissions?
‘The Prisoner’s Dilemma’ can be used to examine why some emitters continue to take little action to reduce their carbon emissions.
Theoretically, all emitters are aware that the socially optimal solution is to work together at reducing their emissions. By doing so the damage to the climate is addressed, and although the emitters may face slightly reduced profits (from costs associated with efforts involved in reducing their emissions) the return is far better than it would be if emitters didn’t control their emissions, the climate continued to change, and productivity suffered as a result.
However, ‘The Prisoner’s Dilemma’ shows us that from an individual point of view emitters are not rationally compelled to think in this way:
- Emitter A does not know if Emitter B will reduce emissions or not.
- What Emitter A does know is that if Emitter B reduces emissions (thereby helping address climate change), Emitter A’s productivity will not suffer. If Emitter A then chooses not to reduce emissions themselves their costs will be less and their profits better. I.e. Emitter A is incentivised to not reduce their emissions, assuming Emitter B does.
- If, on the other hand, Emitter B does not reduce emissions, Emitter A’s productivity will suffer. However, if Emitter A again chooses not to reduce emissions they will still have less costs and therefore their profits will be less affected by the drop in productivity. I.e. Emitter A is still incentivised to not reduce their emissions, even assuming Emitter B doesn’t either.
Can game theory provide a solution?
The key to resolving ‘The Prisoner’s Dilemma’ and guiding both parties toward the socially optimal solution is to introduce an external factor. Assuming an appropriate factor is identified ‘The Prisoner’s Dilemma’ becomes a ‘Coordination Game’, in which the participants are incentivised to co-operate.
In the case of climate change, emitters can be guided toward the socially optimal solution by introducing a carbon price. With a carbon price in place emitters will incur a direct cost for their emissions and therefore be incentivised to reduce them.
In addition, by implementing additional factors such as positive social recognition, and rebating funds raised through the carbon price back to participating emitters so as to aid future carbon reduction efforts and significantly reduce the cost burden of the carbon price, the incentive to reach the socially optimal solution becomes even stronger.
emmi’s vision is to build from the lessons of game theory and provide such a solution. By allowing the carbon price to be set at a social level, and rebating up to 90% of carbon permit revenue back to emitters committed to reducing their carbon emissions, the emmi platform will help guide emissions to the social optimal level.
Removed from the governmental forum, emmi’s solution will provide certainty where the political system has failed to provide it, and by utilising the blockchain the carbon pricing registry will be unbiased, transparent and incorruptible.
Game theory has proven it’s possible to overcome ‘The Prisoner’s Dilemma’ when it comes to climate change; it’s up to us to now utilise that knowledge and make sure carbon emission reduction becomes a reality.
It’s our climate, and our responsibility.