Financing the Reduction of Emissions from Deforestation: A Differential Game Approach

Abstract

This thesis analyzes and compares two versions of a mechanism that aims at mitigating climate change through reducing emissions from rainforest-deforestation. In this mechanism, industrialized countries pay compensations to countries with rainforests if they reduce their deforestation, because it is more cost-efficient than restricting domestic production. The initial question is, which funding possibility yields the best environmental results and is most beneficial for the involved parties. Furthermore, two critical issues of the mechanism are addressed more closely in both scenarios. For this purpose, differential games are developed, in which industrialized countries and countries with rainforests denote the two players. Solutions are obtained by applying Pontryagin's Maximum Principle and the concepts of Nash or Stackelberg Equilibria. Due to the model assumptions, analytical solutions can be found for most of the considered games. It turns out that both versions of the mechanism can be a valuable contribution in the battle against climate change. Moreover, most advantages and disadvantages of the two variants turn out to be robust with respect to parameter changes and small modifications of the model. 'Reducing deforestation is the single largest opportunity for cost-effective and immediate reductions of carbon emissions.'This potential was already seen in the negotiations that led to the Kyoto Protocol in 1997. But no agreement on the precise design could be found and only afforestation became eligible under the Clean Development Mechanism.