Joint implementation under asymmetric information and strategic behavior

Abstract

Joint Implementation (JI) under the Framework Convention on Climate Change means that countries could partly offset their national abatement commitments by investing in CO 2 abatement projects abroad. JI is introduced as a mechanism for achieving a certain global abatement target less costly by separating the commitments from the implementation of measures. This paper studies the design of a JI contract when the investor has incomplete information about the foreign firm which carries out the JI project (the host). Asymmetric information leads to a decrease in the potential cost savings from JI. Furthermore, private information held by the potential host firm could give the firm a significant positive utility of participating in JI projects. The possibility of being a host for a JI project in the future can prevent potential host firms from investing in profitable abatement projects today. The paper analyzes the impact on emissions of CO 2 of strategic behavior among potential hosts for JI projects. Copyright Kluwer Academic Publishers 1996joint implementation, climate policy, incentive contracts, asymmetric information,

The clean development mechanism versus international permit trading: The effect on technological change

“…Such asymmetries may lead to inefficiencies. This is discussed by Hagem (1996) and Wirl et al (1998), among others. Millock (2002) showed how technological transfer, as a part of the CDM contract, can create incentives for mitigating the inefficiency loss from asymmetric information.…”

Carbon Leakage from the Clean Development Mechanism

“…), avoiding perverse incentives to inflate emissions (to achieve/sell more credits), and providing disincentives to introduce environmental policies in Non-Annex B countries. These problems have been widely discussed in previous literature, including Bohm (1994), Hagem (1996), Wirl et al (1998), Fischer (2005), Wara (2008), and Rosendahl and Strand (2009). This literature concludes that there is a significant risk of overestimating the emission reductions from several types of CDM projects; thus global GHG emissions increase as a consequence of these projects.…”

Contracts for Clean Development - The Role of Technology Transfers

“…In particular, including technology transfers in JI or CDM contracts might alleviate the concern that the use of flexible mechanisms reduce incentives for host countries of JI projects to undertake investments increasing energy efficiency and thus reducing long-run emissions (Hagem, 1998). The dynamic effects of the policy proposed in this paper are thus important to investigate in future research.…”

“…The host country in order to obtain a higher transfer payment, and the investing party in order to maximise the credits earned towards its emission reduction commitment under the Kyoto Protocol. Incomplete information limits the efficiency gains from JI (Hagem, 1998), and Wirl, Huber and Walker (1998) and Janssen (1999) propose some mechanisms and institutions to provide correct incentives for JI projects when there is asymmetric information between the investing party and the host party. Yet, the problem of establishing credible contracts for the CDM is somewhat different.…”

“…Since host parties to emission reduction projects would have incentives to maximise the income earned from the project by exaggerating abatement costs in order to get higher financial compensation, demanded emission reduction levels are distorted from first-best in order to get incentive-compatible contracts (as in the models of JI by Hagem, 1998 andby Wirl, Huber andWalker, 1998). In the next Section, I will show how the special features of the CDM may mitigate this distortion.…”