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Low Hanging Fruits problem in CDM and Dynamic Bargaining Problem

Low Hanging Fruits problem in CDM and Dynamic Bargaining Problem. Haruo Imai Jiro Akita Hidenori NIizawa. Outline. 1. Introduction 2. International Environmental Cooperation and Funding Needs, Proposals and Reality 3. Additionality: GEF and CDM The principle causing difficulties

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Low Hanging Fruits problem in CDM and Dynamic Bargaining Problem

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  1. Low Hanging Fruits problem in CDM and Dynamic Bargaining Problem Haruo Imai Jiro Akita Hidenori NIizawa

  2. Outline • 1. Introduction • 2. International Environmental Cooperation and Funding • Needs, Proposals and Reality • 3. Additionality: GEF and CDM • The principle causing difficulties • GIS and New Mechanisms • Post-Kyoto? • 4. Summary • Potential for Innovative Financing

  3. LHF problem • CDM in Kyoto Protocol (1997) • Emission reduction in LDC can be counted toward fulfillment of the obligation by DC • Combined with ET • Possible loss for LDC due to drainage of effective emission reduction projects so that they are no longer available when they are needed.

  4. Literature • Rose et. Al. • Akita • Narrain et. Al. • Brecht et. Al. • Germain et. Al. • (Castro)

  5. Dynamic Bargaining problem • Grout • Hostage • Incomplete contracts • Tadenuma

  6. Specific Example • 1 DC and 1 LDC • Linear benefit Quadratic Costs • Cost schedule represents list of emission reduction projects and costs are investment costs • No technological progress • Benefits only from contemporaneous emission reduction

  7. Specisic example • Emission reduction is possible only in LDC

  8. Payoffs • DC: r’e-m 1st period • R’E - m’ 2nd period • LDC: re – e2/2 + M 1st period • RE – (E2-e2)/2 + M’ 2nd period

  9. Negotiation • 1st period: only DC receives quota, LDC can provide CDM credits • 2nd period: determined that world shall agree to reduce Q” units emission reduction in two periods • 1st period negoptiation: on DC quota q • 2nd period: breakdown of Q”-q between 2 nations

  10. 2nd period negotiation • Agreement on q in the 1st period • Disagreement 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)

  11. Proceeds from CDM or ET • 1st period • Given q, • demand: q • supply: e=p • proceeds: pq=q2 • costs: q2/2

  12. Proceeds from CDM or ET • 2nd period • Given 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

  13. 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

  14. 1st period negotiation • Disagreement outcome • No 2nd period negotiation either and Q” is not binding • Individual optimal (dominant strategy equilibrium) • CDM works like ET

  15. benchmark • Individual optimal: if r < R • delayed action • If r+r’ > R+R’ • efficient allocation calls for early action

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

  17. Patterns • Many cases, bargaining fails • Some other cases, q=0 results. (Inefficiency with no LHF) • Driving force: 1st period disagreement outcome: allows Q” to go away: to good alternative

  18. Tentative: 0 reduction with bound effective for period 2 as the disagreement payoffs q=3.5

  19. Agenda • Q” • Technology, additionality • 2nd period participation

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