Delegating climate policy to a supranational authority: a theoretical assessment

This paper studies the delegation of climate policy to a supranational environmental authority. We develop a simple model of a world consisting of a large number of countries, which derive utility from energy consumption. Countries suffer from global warming and local air pollution, both caused by the combustion of fossil fuels, and decide individually on investments in clean technologies for energy production. A supranational environmental authority decides for each country on the maximally permitted amount of greenhouse gas emissions. We demonstrate that the authority faces a dynamic inconsistency problem that leads to welfare losses, but these losses can be kept small if the authority is endowed with an optimally designed mandate. The optimal mandate penalizes the cost of local air pollution very heavily relative to the cost of global warming. However, delegation of climate policy faces a further difficulty, as countries have a recurrent incentive to change the authority's mandate over time.