It is widely believed that emissions of carbon dioxide (CO2) are contributing to the “greenhouse effect” and causing the planet to warm up. Most observers believe that this warming will ultimately be damaging to the world economy, and perhaps even to the human species. Assume, for now, that every country realizes that the world would be better off if CO2 emissions were reduced. Yet essentially no country is seriously reducing its CO2 emissions. Why not? Frame this problem as one of the Prisoner’s dilemma. Be brief.
One of the perennial questions economists and political scientists strive to explain is why people collectively do things that harm themselves and their societies.
The traditional Platonic explanation for this phenomenon was that since everyone who really knew the good would do it, that all evil was caused by ignorance. In this scenario, though, we posit that the countries in question know the damage caused by the greenhouse effect.
The first issue is that stating that a "country" knows something does not actually make sense. A country isn't a human being, and thus is not capable of knowledge. Thus when we say a "country" knows something, we actually are saying that most individuals in a country know it. But that does not mean that all individuals know it. Despite overwhelming scientific evidence, for example, 2015 front runners for the Republican party nomination for candidacy don't acknowledge the existence of global climate change or evolution, and so might end up in a position to create scientific policies ungrounded in science, despite U. S. scientists being among the best and most knowledgeable in the world. That a country "knows" something does not mean that every one in power or every special interest knows that thing or cares about its consequences.
Next is the issue of what is called the "tragedy of the commons" in which rational agents using a common grazing ground will each maximize grazing, thus destroying the common grazing resource. The "Prisoner's Dilemma" is a similar imagined situation, in which a situation is created where both people would benefit most by cooperating but can possibly maximize individual gain by competing.
These concepts apply to global climate change because each nation can maximize its own wealth over the short term by ignoring global climate change. Over the short term (in which CEOs of companies collect huge salaries and politicians get re-elected), there are costs but not benefits to reducing emissions. Of course, over the long term, if all members cooperate, all benefit, but in theory the nation that takes the cooperative step first loses out if the rest do not follow.
In reality, rather than game theory, the issue plays out differently, first because nations are differentially harmed by global warming, and second because those countries shifting to renewable resources become leaders in an important emerging technology and in energy self-sufficiency, which is a long term economic benefit.