Low Hanging Fruits problem in CDM and Dynamic Bargaining Problem

Haruo ImaiJiro Akita

Hidenori NIizawa

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

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.

Literature

Rose et. Al.AkitaNarrain et. Al.Brecht et. Al.Germain et. Al.(Castro)

Dynamic Bargaining problem

GroutHostageIncomplete contractsTadenuma

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

Specisic example

Emission reduction is possible only in LDC

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

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

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)

Proceeds from CDM or ET

1st periodGiven q, demand: q supply: e=p proceeds: pq=q2

costs: q2/2

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

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

1st period negotiation

Disagreement outcomeNo 2nd period negotiation either and Q” is not bindingIndividual optimal (dominant strategy equilibrium)CDM works like ET

benchmark

Individual optimal: if r < R delayed actionIf r+r’ > R+R’ efficient allocation calls for early action

R = 2, r = 1, R’ = 8 , r’ = 14, Q” = ３ .

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

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

Agenda

Q”Technology, additionality2nd period participation