Solution algorithms for regional interactions in large-scale integrated assessment models of climate change

We present two solution algorithms for a large‐scale integrated assessment model of climate change mitigation: the well known Negishi algorithm and a newly developed Nash algorithm. The algorithms are used to calculate the Pareto‐optimum and competitive equilibrium, respectively, for the global model that includes trade in a number of goods as an interaction between regions. We demonstrate that in the absence of externalities both algorithms deliver the same solution. The Nash algorithm is computationally much more effective, and scales more favorably with the number of regions. In the presence of externalities between regions the two solutions differ, which we demonstrate by the inclusion of global spillovers from learning‐by‐doing in the energy sector. The non‐cooperative treatment of the spillover externality in the Nash algorithm leads to a delay in the expansion of renewable energy installations compared to the cooperative solution derived using the Negishi algorithm.