International Environmental Agreements with reference points

Whether or not the current climate talks achieve a meaningful treaty, the current negotiation forms important reference points for future negotiations. In this paper, we introduce reference points to a canonical model of International Environmental Agreements (IEAs). Countries have reference points on IEA membership. An IEA member that abates is aggrieved if there is a material loss relative to the case with the referenced membership. We find that reference points weakly reduce the abatement level for an IEA with given membership, while interestingly, reference points weakly increase the equilibrium membership and thus the equilibrium abatement level of the IEA. These results imply that effective management of reference points could be conducive to the resolution of the climate problem.