Agricultural Economics Department

Faculty Publications: Agricultural Economics

University of Nebraska - Lincoln Year 

The Design of Supranational

Organizations for the Provision of
International Public Goods: Global
Environmental Protection
E. Wesley F. Peterson
UNLUniversity of Nebraska - Lincoln, epeterson1@unl.edu

This paper is posted at DigitalCommons@University of Nebraska - Lincoln.

http://digitalcommons.unl.edu/ageconfacpub/92
Published in Review of Agricultural Economics 22:2 (December 2000), pp. 355–369. Published on behalf
of the Agricultural & Applied Economics Association by Blackwell/John Wiley . Used by permission.
http://www.interscience.wiley.com/jpages/1058-7195

The Design of Supranational

Organizations for the Provision
of International Public Goods:
Global Environmental Protection

E. Wesley F. Peterson
Department of Agricultural Economics
University of Nebraska–Lincoln

Abstract
An international environmental organization would need to be loosely structured initially
with a focus on a narrow range of environmental issues. It also would need to emphasize
consensus and limit the scope of its interventions to avoid defections by important partici-
pants. The benefits of such an organization include the potential for achieving more nearly
optimal levels of environmental protection, cost savings from reduction of duplication and
managerial economies of scale, and the strengthening of environmental interests in nego-
tiations on the coordination of the environmental regime with other international regimes
such as those focusing on trade or development.

Public goods are characterized by some degree of nonrivalry in consump-

tion as well as difficulty in excluding noncontributors from consuming the good.
These characteristics mean that private agents interacting in competitive markets
will generate less than optimal amounts of such goods. In national contexts, gov-
ernments may supply certain public goods, although some, such as television
broadcasts, also may be supplied by the private sector. In an international setting,
the provision of public goods is problematic because there is no international au-
thority to play the role that governments have in national settings. Kindleberger
notes that the primary international public good is peace, something that, histori-
cally, has been severely undersupplied.
Sovereign nation-states face a wide array of international issues where coop-
eration is needed to attain the best possible outcome. Two problems are inherent
in this process. First, it is often difficult to identify and articulate national consen-
suses on these issues. Second, even if national political systems generate a consen-

355
356   E. W. F. P e t e r s o n in Review of A g r i c u l t u ra l E c o n o m i c s 22 (2000)

sus position, policymakers and politicians may understand that they could gain
by misrepresenting or hiding national preferences or otherwise behaving in an
uncooperative manner in their dealings with the broader international commu-
nity. The purpose of this article is to explore some of the issues associated with
the creation and design of organizations to overcome these difficulties.
The specific international public good that is the focus of this article is global
environmental protection. One aspect of this issue that has generated an exten-
sive literature is the potential for conflict between environmental protection and
international trade liberalization (Esty; Runge, 1994; Johnson and Beaulieu; An-
derson and Blackhurst; Zaelke et al.). The relationship between trade and the
environment was first identified as an important issue in the 1970s (Baumol;
d’Arge and Kneese). Renewed interest in this question has been stimulated by
recent and anticipated trade negotiations. Many of the demonstrators at the
World Trade Organization (WTO) planning meeting in Seattle in December 1999
believe that trade liberalization and environmental protection are incompatible.
The apparent conflict between the international public goods of an open trad-
ing system and global environmental protection has led to wide-ranging pro-
posals for organizational and institutional reform. For some, international trade
(and everything else) should be completely subordinated to environmental rules
(Krause et al.; Krause; Paden). Others call for changes in the WTO that take ac-
count of environmental problems in the pursuit of free trade (McGeorge). A dif-
ferent approach is to further develop international environmental institutions
and organizations to ensure cooperation on environmental issues, leaving trade
and other international questions to existing structures. For example, Esty has
called for the establishment of a “global environmental organization” to defend
environmental principles in the same way that the WTO defends principles of
liberal trade (see also the lead editorial in The Economist, October 9, 1999). It is
this idea that is the focus of this article.
The discussion is organized as follows: In the first section the public goods
problem in an international context is described. In the second section the litera-
ture on the economics of international organizations is reviewed and used to de-
velop a conceptual framework for the design of supranational institutions. This
framework is used to analyze proposals to create an international environmental
organization in the third section.

The Problem of Public Goods

The public goods problem can be represented by the familiar prisoners’ di-
lemma from game theory (see Sandler). The prisoners are unable to establish
an enforceable contract, so they end up following the dominant strategy of de-
fecting from the cooperative solution. As a result, they are collectively worse
off than they would have been had they been able to reach the cooperative out-
come. In the case of public goods, defection is referred to as free-riding. If large
numbers of individuals choose to free-ride, the public good will not be provided
at all despite the fact that most of these same individuals actually would prefer
to have it. Governments, the classic enforcers of contracts, can offer a way out
of this dilemma by forcing everyone to contribute to the provision of the public
good. Of course, those who truly would prefer not to see the public good sup-
Supranational Organizations for International Public Goods  357

plied may end up as “unwilling” riders (Schmid). The incentives to defect are
generated by the two characteristics of public goods noted earlier, jointness or
nonrivalry and difficult excludability. A pure public good, such as national de-
fense or world peace, has both characteristics. A pure private good has neither.
Between these two extremes is found a wide variety of impure public goods
such as cable television broadcasts that are nonrival but from which viewers
who have not paid for their subscription can be excluded or open-access com-
mon-pool resources, such as fisheries, which are rival but from which it is diffi-
cult to exclude individual users.
Legal systems are pure public goods. This is true within a country and ap-
plies equally to international law. Runge (1990) has shown that efforts to liber-
alize international trade constitute an international public good that is likely to
be plagued by free-rider problems. For many national governments, the best ar-
rangement would be to protect politically powerful national industries while the
governments of all other countries remain committed to free trade. Protectionism,
according to this account, is a form of free-riding. The same kind of reasoning
would apply to institutions to regulate such environmental problems as global
warming. If all other countries reduce their emissions of greenhouse gases, a free-
rider would be able to realize the benefits of reduced global warming without ex-
periencing the costs of changing its use of fossil fuels. For international public
goods, provision in optimal amounts is problematic because of the lack of inter-
national authority to backup any agreements reached. International organizations
are often imperfect substitutes for governments that have legislative, policing,
and enforcement powers.
One approach to the study of international public goods is based on the con-
cept of international regimes (Keohane; Young, 1989, 1993). According to Young
(1993), “regimes are social practices based on constellations of rights and rules
that govern interactions among the occupants of recognizable roles defined with
reference to more or less distinct issue areas” (p. 245). International regimes may
include some kind of international organization charged with various func-
tions related to the operation of the regime (Young, 1993). Thus the international
trade regime would have the WTO at its center but also would include regional
trade agreements, public and private associations involved in trade (chambers of
commerce, the United Nations Conference on Trade and Development, the Or-
ganization for Economic Cooperation and Development), and all relevant com-
mercial law whether administered by national, regional, or international organi-
zations. The international environmental regime lacks a centralized equivalent to
the WTO but includes a large number of organizations, treaties, and other insti-
tutions aimed at resolving environmental conflicts and protecting environmen-
tal resources. In 1993, the United Nations Environmental Program (UNEP) listed
171 international environmental agreements, most of which had secretariats or
other types of organizational structures. Both the trade and the environmental re-
gimes can be thought of as institutional structures designed to solve particular
international public goods problems in the absence of a world government. The
existence of complex international regimes does not ensure that the world com-
munity will be able to achieve desirable levels of cooperation. The incentives for
individuals and governments to free-ride are great, and it is often difficult to de-
tect and punish such behavior.
358   E. W. F. P e t e r s o n in Review of A g r i c u l t u ra l E c o n o m i c s 22 (2000)

The Design of Supranational Institutions

Two issues must be addressed in considering the design of supranational or-
ganizations and regimes aimed at overcoming these problems in the provision of
international public goods. The first is the feasibility of creating such structures,
and the second is the optimal form of the institutional arrangement. The first is-
sue can be characterized as a two-level game (Putnam). The first level of the game
takes place in domestic political settings where various interests vie for influence
on the shape of the set of possible international agreements (the win set). The sec-
ond level involves international negotiation to discover the institutional arrange-
ment that lies in the intersection of all the national win sets. The feasibility issue
arises because it may be impossible for national political leaders to articulate a
level-one consensus or because national win sets do not intersect.
The feasibility of establishing an international organization thus is strongly in-
fluenced by domestic considerations and perceived possibilities for beneficial initia-
tives at the international level. Cauley et al. suggest that the likelihood of forming
nonmarket structures to handle the public goods problem depends on the num-
ber of participants, the kinds of expectations (“conjectures”) participants have re-
garding the behavior of the others, and the anticipated costs of creating the orga-
nizations. The greater the number of participants, the greater is the difficulty of
controlling free-riding. Expectations about the behavior of the other participants re-
flect strategic considerations. Cauley et al. show that when participants expect free-
riding, they probably will be unable to solve the public goods problem. If partici-
pants can be assured that others are cooperating, very different expectations may
arise. Runge (1992) has argued that the problem of public goods provision is often
better represented as an assurance problem than as a prisoners’ dilemma (see also
Sandler). Institutions for providing assurance that cooperative behavior is the norm
increase the likelihood of discovering cooperative solutions to the public goods
problem. Finally, high anticipated costs can prevent agreement.
If a supranational organization appears to be feasible, the second issue is the
form of such an organization. For Sandler and Cauley and Cauley et al., form
is represented by the degree of integration (tightness) of the participants in the
agreement. The degree of integration ranges from none (noncooperative Nash
equilibria) to complete cooperation or collusion. In general, both the costs and
benefits of the organizational structure, relative to the noncooperative situation,
increase with the degree of integration. For any feasible arrangement, the benefits
have to be greater than the costs (Frattiani and Pattison). In the case of interna-
tional public goods, benefits may include provision of the public goods if, in the
absence of cooperation, the public good would not be provided at all due to the
expected free-riding. Otherwise, the benefits of cooperation would be reflected in
the more nearly optimal level of provision of the public good compared with the
noncooperative situation.
Sandler and Cauley suggest that the optimal form of organizational arrange-
ment is found by maximizing the difference between benefits and costs. The costs
related to provision of international public goods through supranational struc-
tures include decision-making costs, information and communication costs, en-
forcement and policing costs, and interdependency costs (Sandler and Cauley;
Cauley et al.). Decision-making costs arise from the need to reach agreement on
Supranational Organizations for International Public Goods  359

the form and functioning of the organization. In particular, the kind of decision
rule (simple majority, supermajority, unanimity) adopted can lead to greater or
lesser costs of negotiation and bargaining. Clearly, a decision rule based on una-
nimity would require more time and effort in reaching agreement than a simple
majority vote. One of the reasons the Uruguay Round of trade negotiations took
such a long time to complete (1986–1994) is the requirement that agreements be
approved unanimously.
Information and communication are needed to make decisions and to oper-
ate the institutions. In addition, mechanisms to police and enforce the agreement
must be established to provide participants with the assurance that others are
complying with the decisions taken. Finally, in international settings, there may
be political costs associated with loss of national sovereignty as the international
organizations assume control of some of the functions previously carried out by
national governments. All these costs rise with the degree of integration, the in-
trusiveness of the decision rule chosen, and the number of participants. It has
been argued that the Law of the Sea agreement was so tightly structured that it
was bound to provoke opposition from countries such as the United States, where
the political costs of the agreement simply appeared to be too high (Sebenius).
In addition to the benefits of international public goods that would not be sup-
plied in the absence of international cooperation, international organizations may
generate other benefits for participants. Efficiency gains due to scale economies in
the provision of the public good, the greater amount of information made avail-
able through the supranational structures, and increased political prestige for
those who participate in the agreement are examples. As with costs, these bene-
fits increase with the number of participants and the degree of integration. For in-
ternational public goods such as environmental protection, it may be the case that
only a very inclusive agreement involving many nations will be able to generate
substantial benefits. In this context, the role of hegemonic powers can be very im-
portant. Active leadership by the United States, the European Union, and Japan
generally ensures that multilateral trade negotiations eventually will bear fruit.
On the other hand, U.S. opposition to the Law of the Sea agreement has signifi-
cantly reduced its effectiveness (Sebenius). The degree of integration reflects the
ability of the international arrangement to force compliance, so the greater the
level of integration, the more likely it is that free-riding will be controlled.
Sandler and Cauley refer to the degree of integration as “tightness” and ar-
gue that the marginal benefits of supranational organizational structures dimin-
ish as tightness increases, whereas marginal costs increase with tightness (see also
Sandler, pp. 144–164). These properties ensure that the difference between bene-
fits and costs is maximized where marginal benefits equal marginal costs. In the
case of international public goods, diminishing marginal benefits and increasing
marginal costs seem intuitively reasonable. For example, the benefits provided by
NATO may increase as additional countries join, but the addition to the benefits
provided by adding Hungary to an alliance that includes the United States, the
United Kingdom, Germany, and France may be small. In contrast, marginal orga-
nizational costs can be expected to increase as the institutions become more com-
prehensive and complex.
One problem with this type of representation is that there may be thresholds
beyond which the public good will be supplied but below which it will not. This
360   E. W. F. P e t e r s o n in Review of A g r i c u l t u ra l E c o n o m i c s 22 (2000)

problem can be handled by assessing the feasibility of providing the public good
before attempting to derive the optimal organizational structure (see Sandler and
Cauley). Many of the conceptual models used to evaluate the likelihood of form-
ing supranational organizations are based on simple situations involving only
two countries. When they are extended to the case of many countries, additional
layers of complexity arise. For example, Cauley et al. show that there are fixed
costs of forming nonmarket linkages between each participant in the agreement
and argue that the benefits of each linkage have to be greater than these fixed
costs for that linkage to be viable. If organizational effectiveness depends on a
large number of linkages, the fixed costs could preclude agreement.
In summary, decisions to establish supranational organizations must take ac-
count of the kinds of benefits and costs associated with such arrangements as
compared with the noncooperative equilibrium. A necessary condition for the vi-
ability of such structures is that the benefits be greater than the costs. However,
this condition is far from sufficient. International agreements require commit-
ments from sovereign nation-states that may have very different objectives. In ad-
dition, the nature of the benefits and costs varies with the institutional arrange-
ments under consideration. The critical factors in designing such organizations
include the degree of integration, the number of participants, and the type of de-
cision rule adopted. In the next section the conceptual framework outlined above
is used to consider the feasibility and design of an international environmental
organization (IEO).

Designing an International Environmental Organization

The question posed in this part of the article is whether an IEO as described in
several proposals (Esty; Runge, 1994) could be designed to defend environmen-
tal principles in the way that the WTO defends liberal trade principles. In ana-
lyzing the advantages and disadvantages of an IEO, it is first necessary to define
the alternative that forms the basis for comparison. The current environmental re-
gime is characterized by moderate cooperation and numerous decentralized or-
ganizations charged with handling widely differing environmental issues. Esty
characterizes the current situation as a prisoners’ dilemma that generates signif-
icant free-riding resulting in less than optimal amounts of global environmental
protection (see also Hoel). In contrast, Carraro and Siniscalco argue that stable,
beneficial arrangements on environmental protection can arise spontaneously de-
spite the apparent noncooperative structure of these interdependencies. If true,
this would mean that only limited supranational structures would be needed to
protect the environment because nations will see that it is in their interests to vol-
untarily contribute to the provision of the public good. This conclusion does not
seem tenable, however, given that significant environmental degradation is oc-
curring. For example, overfishing has become such a problem that several Cana-
dian and New England fisheries have almost been destroyed (Economist Survey,
May 23, 1998, p. 8). Most of the evidence would seem to suggest that the alterna-
tive to further efforts to institute international cooperation would be a Nash equi-
librium in which significant environmental destruction would continue to occur,
although some environmental protection would end up being supplied through
specific agreements and limited amounts of unilateral efforts.
Supranational Organizations for International Public Goods  361

Some authors favor restructuring the WTO as an approach to global environ-

mental protection (McGeorge). Others point to the environmental side agreement
to NAFTA as a possible model for reconciling trade and environmental issues
(Runge, 1994; Johnson and Beaulieu). Bhagwati has noted that environmental
questions will be prominent in future multilateral trade negotiations in the con-
text of the WTO and the same will be true for regional trade talks. This does not
mean, however, that attempting to use the trade regime as a vehicle for solving
global environmental problems is a good idea. Anderson (1992) and Runge (1992)
have shown that using trade policies to achieve environmental objectives is likely
to be ineffective in controlling free-riding and could seriously undermine the pri-
mary purpose of the WTO, which is to promote principles of liberal trade. On the
other hand, in an extensive exercise in second-best analysis, Rauscher shows that
there may be cases where trade barriers are appropriate for environmental protec-
tion if first-best environmental policies are unattainable. For the purposes of the
following discussion, strategies to resolve global environmental issues through
modification of international trade institutions will not be considered.
A stylized image of an IEO can be developed from Esty’s discussion. He ar-
gues that an “overarching” environmental organization is needed because the
current global environmental regime is allowing substantial irreversible environ-
mental damage to occur. Economists favor the institution of such mechanisms
as tradable pollution permits, pollution fees, and other “market-oriented mech-
anisms” to control pollution in national settings (see Bojö et al., pp. 92–111). Esty
embraces such initiatives as fees, permits, and other types of property rights reg-
ulation at the international level but notes that some form of global authority will
be needed if they are to be made effective (p. 79). He recommends an organiza-
tional structure that would defend a relatively small set of environmental prin-
ciples such as a principle that the agents responsible for negative environmental
externalities should bear the costs of their actions (the “polluter pays” principle)
or the principle that pollution prevention is to be preferred to pollution treat-
ment. The “global environmental organization” he proposes would pull together
the current decentralized system of treaties and agreements and such organiza-
tions as the United Nations Environmental Program (UNEP) or the United Na-
tions Commission on Sustainable Development (CSD), both of which Esty con-
siders to be too narrowly focused (pp. 90–91).
In defining this organization, Esty relies heavily on analogies with the WTO
and other international organizations. He notes that the International Labor Of-
fice (ILO) is an interesting model in that it involves private-sector business and
labor organizations as well as governments (p. 95). WTO voting rules that em-
phasize consensus but tend to allow substantial scope for hegemonic leadership
are offered as a useful model for an international environmental organization
(p. 95). Esty argues that this organization could serve as a forum for discussion
of environmental issues, encourage countries to harmonize their environmental
legislation, serve as a clearinghouse for data and information on environmental
questions, monitor agreements, and administer a fund aimed at resolving global
environmental problems. There is little discussion in Esty’s proposal of enforce-
ment of negotiated environmental conventions. He does note that the idea of levy-
ing carbon taxes and other intrusive measures probably would encounter resis-
tance from sovereign nations and suggests that a way around this is to use funds
362   E. W. F. P e t e r s o n in Review of A g r i c u l t u ra l E c o n o m i c s 22 (2000)

contributed by member states to subsidize efforts to implement sound environ-

mental regulations (p. 84). Finally, he suggests that such an organization proba-
bly would need to concentrate initially on the most pressing problems, with the
expectation that the scope of the organization would expand over time (p. 81).
The first question raised by this proposal is whether such an organization
would be feasible in the sense that its aggregate benefits would be greater than
the aggregate costs at the same time that the benefits to individual nations would
be seen as greater than the costs they would incur in participating in the organi-
zation. Note that the requirement that the net benefits for each individual nation
have to be positive is ambiguous. As pointed out by an anonymous reviewer, it is
often the case that the politically powerful determine whether to participate in in-
ternational agreements, particularly in nondemocratic regimes. If these individ-
uals perceive that they will not benefit from an agreement, they may refuse to
participate even if net national benefits are positive. The aggregate benefits of an
international environmental organization would be any increases in environmen-
tal protection beyond what can be attained under current arrangements. Costs
would include direct administrative and operating costs as well as costs associ-
ated with procuring and distributing information, enforcement, policing, and loss
of autonomy. Information concerning the effects of various practices on the envi-
ronment, the costs of alternative solutions to environmental problems, and a host
of other questions would be needed and could be costly. Some of this information
is already being collected, so the increase in cost over the current situation may
not be great.
The most visible costs of an IEO would be the direct administrative costs. Scott
suggests that cooperative agreements are costly to administer primarily because
of different beliefs about the distribution of benefits and costs among the partic-
ipants and different sets of information on which to base judgments. Ensuring
that all participants have access to the information they need to make informed
decisions on rules and the functioning of the organization could be costly given
the uncertainty associated with many global environmental problems. For exam-
ple, economic studies have produced widely varying estimates of the costs and
benefits of alternative strategies for preventing global warming (Schmalensee;
Weyant). Many feel that lack of scientific understanding and uncertainty concern-
ing both physical and economic impacts of greenhouse gas emissions mean that
it would be premature to undertake draconian measures to reduce them (Nord-
haus; Poterba). Deciding which of the competing sets of information should be
taken as the basis for discussion could be controversial, and this adds to organi-
zational costs because of the time and effort required to reach agreement.
To get some sense of the size of potential costs and benefits, it is informative
to refer to figures first suggested in the context of the United Nations Conference
on Environment and Development (UNCED) held in Rio de Janeiro in 1992. This
conference addressed wide-ranging development issues as well as questions on
the global environment. Two international environmental treaties (global climate
change and biodiversity) were opened for signature at the Rio Summit, and two
other documents, the Declaration of Rio de Janeiro and AGENDA 21, were ad-
opted after a great deal of preparatory work(Robinson). Estimates presented at
the Rio Summit indicated that about $540 billion dollars per year would be re-
quired to accomplish the AGENDA 21 program, with $125 billion per year to be
Supranational Organizations for International Public Goods  363

supplied by high-income countries as development assistance and the rest com-

ing from the private sector and developing countries themselves (Sitarz, p. 310).
Of the $125 billion in concessional assistance, about $15 billion would be devoted
to global environmental issues, with the rest targeted at sustainable development
programs in developing countries (Robinson). It is also estimated that $750 mil-
lion would be needed to “strengthen international institutions” (Robinson, p.
678). The budget for UNEP is about $30 million per year, and the Global Envi-
ronmental Facility (GEF), established to assist developing countries with environ-
mental projects, operates a fund of about $2 billion (Esty, p. 87). For comparison,
total world GDP in 1997 was about $30 trillion, U.S. GDP was $7.7 trillion, and
the total value of world trade was $5.4 trillion (World Bank). On the other hand,
official development assistance from OECD countries in 1997 was $48.3 billion,
far less than the $125 billion called for in the AGENDA 21 program. Private finan-
cial flows at market rates were $128.5 billion in that year (OECD).
Some of these cost estimates are difficult to interpret. The estimate of $540 bil-
lion in needed expenditure per year is both a cost and an indication of the size of
the benefits. At about 1.8% of world income, expenditures of this size would seem
to be somewhat unlikely. Current public and private flows for all purposes from
the industrialized countries to the low-income countries amount to only about
$175 billion, and it is unlikely that developing countries would be able to make
up the difference out of their own resources. The authors of AGENDA 21 clearly
feel that investments of this magnitude will prevent much greater environmen-
tal losses. On the other hand, the organizational costs identified are fairly modest,
as is the UNEP budget. If these estimates are taken as reasonably accurate, the di-
rect costs of existing international organizations appear to be relatively small, and
this is likely to be the case for an IEO as well, particularly if it is based initially on
existing structures such as UNEP. However, these are not the only costs that en-
ter into the determination of the feasibility of the proposed organization. To the
extent that the IEO is effective and international conventions on environmental
protection are enforced, the costs associated with losses in autonomy or national
sovereignty could be perceived by many governments as quite large. It is signif-
icant that numerous national delegations to the preparatory conferences for the
Rio Summit expressed opposition to the creation of new environmental institu-
tions (Robinson, p. 690). Members of the international community have different
environmental goals, as reflected by the differing needs and aspirations of indus-
trialized and less developed countries. Environmental protection is often seen by
economists as a normal good in that demand for such efforts rises as incomes in-
crease (Sandler, 1997). In many low-income countries, protection of environmen-
tal amenities is seen as less important than promoting economic growth and rais-
ing living standards. This contrasts with the values attached to the environment
in wealthy countries. These differences could mean that the respective win sets
on environmental issues do not intersect.
However, the existence of such agreements as the Convention on Interna-
tional Trade in Endangered Species (CITES) show that cooperation between low-
income and industrialized countries is not impossible. Less developed countries
may see the costs of an IEO as quite large but be willing to participate if wealthier
countries offer compensation or some other kind of incentive. Carraro and Sinis-
calco show that the gains from partial cooperation can be used to finance transfers
364   E. W. F. P e t e r s o n in Review of A g r i c u l t u ra l E c o n o m i c s 22 (2000)

that induce others to join international coalitions. The idea of paying low-income
countries to participate in environmental agreements is not without precedent.
For example, the Montreal Protocol on Substances that Deplete the Ozone Layer
includes a multilateral fund that will offer grants and loans to developing coun-
tries to help them finance the provisions of the agreement (Széll). In addition, the
Kyoto Protocol to the United Nations Framework Convention on Climate Change
provides for financial assistance from industrialized countries aimed at encourag-
ing low-income countries to adopt technologies that generate lower greenhouse
gas emissions as well as to protect rain forests that act as carbon sinks (United
Nations). Some transfers of this nature can be seen as a redefinition of property
rights that would enhance institutional efficiency. Zilberman points out that de-
veloping countries receive few benefits from pharmaceutical products developed
from rain forest organisms and thus have little incentive to preserve the rain for-
est. In this case, financial transfers may amount simply to payments for what
rightfully belongs to developing countries.
The differing environmental perspectives of developing and industrialized
countries are not the only source of costs related to national sovereignty. The be-
lief that dispute-resolution provisions in both the NAFTA and Uruguay Round
trade agreements constituted an infringement of national sovereignty led to fierce
political opposition to these agreements in the United States. One way to reduce
concerns over national sovereignty in an IEO may be to borrow the notion of sub-
sidiarity that has become a cornerstone of policies in the EU (Dietz et al.). Subsid-
iarity calls for policy initiatives to be carried out at the administrative level that is
most appropriate for the issue being addressed. Thus local land-use policies and
zoning laws should be administered by local and regional authorities rather than
by EU bureaucrats in Brussels. On the other hand, broad policies related to the
coordination of transportation within the EU, for example, require higher-level
intervention. Subsidiarity is particularly relevant for the management of environ-
mental issues. There are many types of environmental problems, some of which
are primarily local, whereas others require global action. In the spirit of subsid-
iarity, an IEO could limit the scope of its activities to environmental problems
that are truly global (protecting the ozone layer, global warming), while local and
regional issues are left to national and regional organizations. The distinction be-
tween local and global is often arbitrary, but it is likely that a working definition
could be derived so that, for example, the world’s oceans would be considered
part of the global commons, while acid rain in Europe would be seen as a Euro-
pean problem best left to regional organizations and purely national questions
such as policies on mining would be left to national governments. The GEF ap-
pears to have made just such a distinction, targeting its funding at projects to pro-
tect the global climate, biodiversity, the ozone layer, and common property water
resources (Esty). Dividing responsibility for the different types of environmental
issues between national, regional, and global organizations may help to assuage
fears that an IEO would violate national sovereignty. On the other hand, U.S. op-
position to the Kyoto Protocol shows that concerns about infringements of na-
tional sovereignty can come into play even when an agreement pertains to a truly
global issue.
If the global benefits of an IEO are greater than the information, compensa-
tion, autonomy, and other administrative costs, and if the perceived benefits for
Supranational Organizations for International Public Goods  365

each participating nation are greater than its perceived costs, the IEO would be
feasible. If an IEO appears to be feasible, the form, structure, and scope of the or-
ganization can be addressed. The 171 treaties, protocols, and agreements listed
in the UNEP register address an extraordinarily diverse set of issues. For exam-
ple, there are agreements on international common property (fisheries, forests,
the ozone layer, global climate), transboundary pollution or pollution of jointly
held air and water resources (acid rain), protection of wildlife (whales, migratory
birds), regional management of environmental resources (the Niger River Ba-
sin, the Rhine, the Mediterranean Sea, Antarctica), hazardous substances (nuclear
waste, benzene), protection of the world heritage (archaeological, artistic, histori-
cal), control of pests (desert locusts) and protection of farm animals and plant re-
sources, and regulation of military activities. Not only do these agreements cover
a large number of issues, the type of market failure addressed by the different
kinds of agreements varies widely. For example, the type of externality related to
marine mammal protection is different from the public goods problem associated
with protecting the ozone layer. In the first case, the issue concerns whose rights
to the use of marine mammals are to be supported, those who wish to consume
the resource by killing it as opposed to those who wish to consume it by preserv-
ing it. In the case of the ozone layer, the issue is how to prevent free-riding on the
efforts of others to protect the upper atmosphere.
The wide variety of agreements that have been reached raises an issue of com-
prehensiveness when considering the design of an IEO. An IEO charged with man-
aging all these diverse agreements could become so complex that it would be ex-
tremely costly to organize and run. The principle of subsidiarity discussed earlier
would have the added advantage of limiting the scope of the organization to a
more manageable set of problem areas. Thus the IEO might serve as an umbrella
organization to oversee agreements on greenhouse gases, ocean pollution, the Ant-
arctic, wildlife (whales, migratory birds), world heritage sites, and hazardous ma-
terials, for example. It also might serve as a resource for scientific information that
could be drawn on by organizations charged with managing river basins or con-
trolling transboundary pollution that affects a limited number of countries. For is-
sues that can be handled within nations, it would have no direct responsibilities.
The environmental side agreement to NAFTA is consistent with this type of ap-
proach. It emphasizes the enforcement of national environmental policies by do-
mestic institutional structures rather than assuming direct administrative responsi-
bilities for environmental protection in the region (Beaulieu and Johnson).
The advantage of a centralized organization, even if its scope is somewhat lim-
ited through subsidiarity and respect for national sovereignty, is that there may
be economies of scale that would reduce the total administrative costs compared
with the present decentralized system. Esty argues that the current environmen-
tal regime is characterized by:
… confusion, duplication and incoherence. A dozen different U.N. agencies, the
secretariats to a number of environmental treaties and conventions, the World
Bank, regional political groups, and the world’s 190 countries acting individu-
ally try to cope with the planet’s environmental problems [p. 78].

This suggests that there could be efficiency gains and reduction of duplication
from creating an IEO to oversee at least part of this diverse set of organizations.
366   E. W. F. P e t e r s o n in Review of A g r i c u l t u ra l E c o n o m i c s 22 (2000)

However, it would still be useful for such an organization to center its activi-
ties on the defense of a limited set of basic principles. The WTO secretariat, for ex-
ample, has been able to coordinate a significant number of regional trade agree-
ments, commodity agreements, preferential trade arrangements (e.g., the Lomé
Convention), free-trade areas, and customs unions alongside its primary mission
to promote multilateral trade liberalization. But all these institutions derive from
a common philosophical perspective that highlights the benefits of free trade and
attempts to limit exceptions to its basic principle of nondiscrimination. This ex-
ample suggests that a focus on a narrow range of principles may be important in
defining the scope of an IEO.
The scope of an IEO is not the only design question that needs to be resolved.
The benefits and costs associated with an IEO will depend on the number of par-
ticipants, the degree of integration, and the type of decision rule chosen. If the
IEO is designed to focus on such inherently global issues as protecting the ozone
layer, it may be necessary for it to include virtually all the countries in the world.
This clearly raises the organizational and operating costs. The necessary inclu-
siveness of such an IEO and the importance of the participation and leadership of
the most powerful countries have implications for the degree of integration of the
organization. Cauley et al. suggest that a loose organization would leave almost
complete autonomy to the participants, whereas increasing the degree of integra-
tion reduces their independence. The more tightly the organization is structured,
the more likely it is that it will be capable of controlling free-riding by the partici-
pants, thereby ensuring that a more nearly optimal level of global environmental
protection is provided. This suggests that an effective IEO would have to be not
only inclusive but also tightly structured. However, while tightly structured or-
ganizations would appear to be more effective at controlling free-riding, the ex-
perience with the Law of the Sea treaty suggests that an organization based on a
high degree of integration could be undermined by the defections of important
participants (Sebenius). Sandler suggests that many international environmental
agreements, including the Montreal Protocol, have been set up initially as loosely
structured conventions that subsequently were made more intrusive as the un-
certainties surrounding the nature of the environmental problem were reduced.
Esty recognizes this issue, arguing that the proposed organization should focus
initially on the most critical environmental problems, with the expectation that its
scope might expand over time.
Finally, the decision rule chosen is an important factor in the costs and bene-
fits of an IEO. The WTO decides on the basic rules of international trade with a
unanimity rule. The EU uses a system of weighted-majority voting that allows a
coalition of one or two large countries plus one or two small countries to form a
blocking minority. For certain decisions, the United Nations uses majority voting,
whereas other cases are resolved through unanimity of a small subset of mem-
bers. An IEO might follow the WTO model by requiring full consensus on the es-
tablishment of minimum environmental standards. Such an arrangement would
raise the decision-making costs, although the exercise of strong leadership by a
subset of powerful members could help to overcome this problem. In addition, if
most of the difficult decisions stem from differences in objectives between indus-
trialized and developing countries, the compensation mechanisms discussed ear-
lier could soften the impact of a unanimity rule.
Supranational Organizations for International Public Goods  367

Based on the preceding analysis, it appears that a feasible IEO would have
to be inclusive but loosely structured initially to obtain the support of sovereign
nations with diverse goals and interests. A decision rule emphasizing consensus
would provide assurance to participating governments that they would be able
to prevent decisions that appeared highly unfavorable to their national interests.
These design attributes mean that the suggested IEO might not generate enough
of an increase in environmental benefits compared with the status quo regime to
justify the administrative costs of the organization. Determining both the feasi-
bility and form of an IEO would require knowledge of the increases in benefits
and costs compared with the current system and the relation of these changes to
the degree of integration, number of participants, and the decision rule. Because
the benefit and cost schedules are not easy to identify, the preceding discussion
of the design of an IEO is somewhat speculative. Nevertheless, it seems clear that
a tightly structured organization would be unacceptable to many governments
and that the most reasonable organizational structure would be one that relies on
subsidiarity and leaves most enforcement to national institutions. It might be ex-
pected that tighter structures could be introduced as environmental understand-
ing increases and national consensuses begin to converge.

Conclusion
Clearly, a great many more details would need to be worked out in order
to decide if an IEO would be feasible and, if so, what the precise configuration
ought to be. The analysis in the preceding section draws attention to the impor-
tance of defining a narrow set of fundamental principles to serve as the basis for
the organization and operation of such a set of institutions. Principles such as the
polluter-pays principle and an emphasis on enforcement of domestic legislation
could help to provide assurance that other countries are not free-riding. As noted
by Cauley et al., the development of positive conjectures about the behavior of the
other participants is of great importance in reinforcing cooperation. The analysis
also suggests that an IEO would have to be inclusive to be effective. This raises a
serious question concerning feasibility because costs increase with the number of
participants. If most of the nations of the world need to join the IEO for it to re-
alize its objectives, some mechanisms for compensation and, perhaps, redistribu-
tion of income may be needed to overcome the resistance of developing coun-
tries more concerned with economic growth than environmental degradation. A
critical design element identified in the preceding section is the choice of deci-
sion rule. If the IEO includes many countries, it may be necessary to allow sub-
stantial latitude for members to veto particular decisions. While a unanimity rule
raises the costs of decision making, participation in an IEO that generates signifi-
cant autonomy costs may not be forthcoming unless the decision-making process
emphasizes consensus. Finally, it would be important for an IEO to be loosely
structured initially to gain adherence from countries worried about their national
sovereignty. Such a structure could evolve toward a more intrusive organization
once more general agreement on the advantages of subjecting national policies to
international supervision had been reached.
The critical issue is whether such an organization would generate sufficient ben-
efits to offset the costs of negotiation and administration. These costs could be sig-
368   E. W. F. P e t e r s o n in Review of A g r i c u l t u ra l E c o n o m i c s 22 (2000)

nificant, and it is important to recognize that large international bureaucracies can

themselves be a source of inefficiency and waste. On the other hand, Esty points
to a great deal of duplication and confusion in the current system. The benefits of
an effective IEO would include the reduction of these costs as well as the potential
for a more nearly optimal provision of global environmental protection. An added
benefit of such an organization would be to put the international environmental re-
gime on the same footing as other international regimes such as the one governing
international trade. It is clear that the need for improved coordination of the trade
and environmental regimes will receive increased attention in the coming years,
but much of the discussion will take place at the initiative of the WTO. In addi-
tion, there are many coordination issues that involve the environmental regime and
other international regimes such as those targeting international security, foreign
aid and development, and human rights. A centralized environmental organiza-
tion may prove more effective at ensuring a hearing for environmental interests as
these issues arise than the present decentralized system.

Acknowledgments
Todd Sandler provided helpful comments on an earlier draft of this article. The comments
of two anonymous reviewers are also acknowledged. The research reported in this article was
supported by the Agricultural Research Division (Journal Series No. 10797) of the University of
Nebraska.

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