Low Hanging Fruits problem in CDM and Dynamic Bargaining Problem Haruo Imai Jiro Akita Hidenori...
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Low Hanging Fruits problem in CDM and Dynamic Bargaining Problem
Haruo ImaiJiro Akita
Hidenori NIizawa
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Outline
1. Introduction2. International Environmental Cooperation and Funding Needs, Proposals and Reality3. Additionality: GEF and CDM The principle causing difficulties GIS and New Mechanisms Post-Kyoto?4. Summary Potential for Innovative Financing
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LHF problem
CDM in Kyoto Protocol (1997)Emission reduction in LDC can be counted toward fulfillment of the obligation by DCCombined with ETPossible loss for LDC due to drainage of effective emission reduction projects so that they are no longer available when they are needed.
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Literature
Rose et. Al.AkitaNarrain et. Al.Brecht et. Al.Germain et. Al.(Castro)
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Dynamic Bargaining problem
GroutHostageIncomplete contractsTadenuma
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Specific Example
1 DC and 1 LDCLinear benefit Quadratic CostsCost schedule represents list of emission reduction projects and costs are investment costs No technological progressBenefits only from contemporaneous emission reduction
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Specisic example
Emission reduction is possible only in LDC
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Payoffs
DC: r’e-m 1st period R’E - m’ 2nd periodLDC: re – e2/2 + M 1st period RE – (E2-e2)/2 + M’ 2nd period
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Negotiation
1st period: only DC receives quota, LDC can provide CDM credits2nd period: determined that world shall agree to reduce Q” units emission reduction in two periods1st period negoptiation: on DC quota q2nd period: breakdown of Q”-q between 2 nations
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2nd period negotiation
Agreement on q in the 1st periodDisagreement payoffs = Individual optimal behavior (Nash equilibrium = dominant strategy equilibrium)Given quota agreed, competitive market determines emission price and trade which are out of control by the nations(Individual traders do not care for benefits)
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Proceeds from CDM or ET
1st periodGiven q, demand: q supply: e=p proceeds: pq=q2
costs: q2/2
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Proceeds from CDM or ET
2nd periodGiven Q, Q’, s.t. Q + Q’ = Q” - q, demand: Q+Q’ supply: E+E’=P proceeds: P(Q”-q)=Q”2- qQ” costs : (Q”2- q2)/2
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Corner solution
q cannot exceed Q”If q is more than LDC’s individual optimal of the 2nd period, then the 2nd period disagreement outcome is (0,0) non-negativity of net payoffs
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1st period negotiation
Disagreement outcomeNo 2nd period negotiation either and Q” is not bindingIndividual optimal (dominant strategy equilibrium)CDM works like ET
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benchmark
Individual optimal: if r < R delayed actionIf r+r’ > R+R’ efficient allocation calls for early action
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R = 2, r = 1, R’ = 8 , r’ = 14, Q” = 3 .
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Patterns
Many cases, bargaining failsSome other cases, q=0 results. (Inefficiency with no LHF)Driving force: 1st period disagreement outcome: allows Q” to go away: to good alternative
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Tentative: 0 reduction with bound effective for period 2 as the disagreement payoffs
r=2, R=14 r’=3 R’=8 Q”=4
q=3.5
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Agenda
Q”Technology, additionality2nd period participation