To Slow Warming, Tax Carbon [The New York Times, Published: November 11, 2012]. The main reason emissions have been going up is the rise of coal in...

To Slow Warming, Tax Carbon [The New York Times, Published: November 11, 2012]. .. The main reason emissions have been going up is the rise of coal in China, in particular. Coal is now the source of 30 percent of the worlds energy, up from about 25 percent in the mid-1990s. Europes initiatives have had no effect on Chinas policies or the global coal burn. Indeed, the initiatives have probably made the situation worse. As the price of energy has increased using current renewables, energy-intensive industries are being driven o¤shore, only for their products to be imported back into the European Union. By the standards of the Kyoto accord, Europe looks good. But those standards measure each countrys production not consumption of carbon. This has created counterproductive incentives. If steel plants are closedin Britain and replaced by steel imports from China, Britain counts that as a success. Between 1990 and 2005, Britains carbon production fell by about 15 percent but its carbon consumption rose by 19 percent, when imports were counted. The rest of Europe has been deindustrializing too, and this has also encouraged energy-intensive production to move overseas. Let us analyze the carbons consumption in Britain using game theory, assuming that the Kyoto Protocol not only penalizes coal production but also coal consumption. Britain and China have to decide whether to consume renewable (clean) or coal (dirty) energy. However, Britain signed the Kyoto protocol in 1997 and,hence, its coal consumption makes more di¢ cult to achieve the reduction in CO2 emissions. Assume that Coals consumption generates a negative cost to Britain equal to -15 million when it is the only country consuming it, however, if China also consumes coal this negative cost triples. The cost of consuming coal in China is zero when it is the only country using coal, since China did not signed the Kyoto protocol; however, this cost becomes a benet equal to 5 million when both countries consume coal given that Britain imports coal from China. If both countries move away from dirty energy, Britain enjoys an environmental benet equal to 28 million and Chinas environmental benet is half Britains benet. However, if only one country consumes renewable energy Britains benets decrease to 10 million and Chinas benets are 14.1. Draw the normal form game and identify the countriespayoffs. (3 Points)2. What is the Nash equilibrium of the normal form game? (3 Points)3. Draw the extensive form of the game and identify the countriespayoffs. Assume that Britain is the first mover of this game. (4 Points)4. What is the Nash equilibrium of the extensive form game? (3 Points)

To Slow Warming, Tax Carbon [The New York Times, Published: November 11, 2012]. “.. Themain reason emissions have been going up is the rise of coal — in China, in particular. Coal isnow the...