The first assumption (A1) requires that the underlying cost parameter is fully
positively correlated between countries. Does there exist international environ-
mental problems where the costs of reductions are positively correlated between
countries? This could be the case in situations, where, if a country takes unilat-
eral actions, it has to implement measures that hereafter are also available to
other countries. Examples of this are measures to reduce current CO2 emissions.
If the establishment of windmills and their integration into the conventional en-
ergy-system can be shown to be cheap, it will be cheap for every country that
can use wind for energy production. If the switching from coal fired to natural
gas fired power plants is revealed to be cheap, this can be used for any country
that uses coal as it’s fuel-input. The most classical example, which shows a case
with positively correlated costs, and how their revelation enables further reduc-
tions, can be found in the efforts to control substances that deplete the ozone
layer. In 1987, a breakdown in the negotiations over the Montreal Protocol
seemed inevitable, but following the rapid development of acceptable (i.e.,
cheap) substitutes (in the US) producers had much to gain from a CFC-ban.
Producers had no incentives to put up any political opposition to the Montreal
protocol, and a breakthrough in the negotiations occurred.11
Although costs are not likely to fully positively correlated, for now, this is as-
sumed, but the analysis could be thought of as being used to answer the follow-
ing question: How does correlation of costs influence the likelihood of profit-
able unilateral actions? In section 7, it is analysed how changes in the correla-
tion affects the likelihood of unilateral actions.
Assumption A2 says that a country become get fully informed about costs,
without undertaking the actual reductions: To make our analysis tractable, it is
simply (but somewhat unrealistically) assumed that it can be fully informed.
We assume that the country incurs a fixed (sunk) cost of being informed. This
could range all the way from detailed reports to the establishment of non-
11 Sandler, 1997, page 113.
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