No participation constitutes the benchmark for evaluating the costs and benefits of policies designed to control GHG emissions under alternative coalition structures. It is usually named the baseline (or business as usual) scenario, because it identifies the values of the main environmental and economic variables when no coalition forms and no action, unilateral or co-operative, is adopted (IPCC SAR (IPCC, 1995) is a good example of this approach). The construction of the baseline scenario is very important to assess both the profitability and the stability (i.e., whether it is self-enforcing) of a coalition. A coalition is profitable when welfare after the coalition is formed is larger than in the no participation case. A coalition is self-enforcing if there are no incentives to leave or enter the coalition. The baseline scenario crucially affects these incentives also. If the no participation case is such that emissions decline and the target can be achieved easily through small emission reductions, then the incentives to join the coalition (sign the agreement) are much higher, so a coalition with many countries is more likely to form (Barrett, 1997b). Symmetrically, if large emission reductions are necessary, abatement becomes more costly, and incentives to free-ride increase, which further increases the costs for co-operating countries (particularly if leakage is high).

A careful definition of the no participation case is therefore very relevant to assess the likelihood of large coalitions and thus the efficiency of a climate agreement. But it is also very relevant in terms of equity. When the burden of emissions abatement has to be shared equitably, it is important to distribute emissions targets with reference to the baseline scenario. Each country therefore has an incentive to pretend that its own baseline scenario implies larger emissions than is actually true (Grubb, 1998; Bohm, 1999). In this way, the actual cost for the country would be lower. An optimistic scenario in which predicted emissions are lower than “true” emissions (as measured ex-post) leads countries to agree on low emission-reduction targets, but forces countries to more reductions later and to pay abatement costs larger than expected. A pessimistic scenario makes the agreement more difficult because larger emission reductions have to be agreed, but countries find themselves in a better situation and pay lower costs ex-post. Hence, if a country succeeds in convincing the others that its own baseline emissions are larger than the “true” ones, then this country achieves relative benefits in terms of less-stringent emission targets and lower abatement costs.

The definition of a baseline scenario has therefore a strategic dimension and can hardly be defined as an “objective” evaluation of future economic and environmental cycles and trends. It is therefore important to collect, as in Chapter 2, the largest amount of information from different sources and to identify the scenario more as an average of much scattered information, rather than as a subjective analysis of likely future events. This may reduce the likelihood of strategic definitions of the baseline scenario and may partly prevent the consequent impacts on the equilibrium coalition and on the assessment of costs and benefits of climate policies.

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