(Self-) Enforcement of Joint Implementation and Clean Development Mechanism Contracts

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. A fundamental problem associated with the effectiveness and stability of international JI/CDM contracts arises from the fact that international contracts are difficult to enforce because they are made between entities that fall under the jurisdiction of distinct sovereign states. This paper investigates strategies to cope with this problem from a game theoretic perspective. Terms of use: Documents inThe first section gives a brief idea of the Kyoto Mechanisms. The second section analyses the fundamental problem of international JI/CDM contracts by modelling them as a non-cooperative, simultaneous one-shot game. The two players represent a JI/CDM project sponsor and the foreign project host that implements the JI/CDM project, respectively. It is shown that without any specific provisions against breach of contract, both JI/CDM contract parties will renege on their respective contractual obligations by behaving non-cooperatively. Consequently, the JI/ CDM project will not be realised and the associated efficiency gains are not seized.The third section analyses how to design institutions and strategies that credibly commit both JI/CDM contract parties to meet their contractual obligations by behaving cooperatively. One option for stabilising the JI/CDM contract focuses on the potential role of national environmental authorities. It is explored if they could provide a mechanism by which potential JI/CDM project sponsors could credibly commit to cooperative behaviour. IIIIt is argued that national environmental authorities indeed may serve this function by penalising breaches of JI/CDM contracts on the part of the contract party belonging to its jurisdiction. The paper derives the minimal required level of the penalty.Another option involves sequential moving on the one hand, and on the other hand strategic delegation of contract fulfilment to an agent who plays the JI/CDM game on behalf of the project host. The delegation arrangement is fixed by a binding contract between the principal, i.e. the JI/CDM project host, and an agent. The paper derives conditions that allow the implementation of the cooperative solution of the modified JI/CDM game. These conditions refer to the incentive-compatible payment to the agent.IV

Joint Implementation in Climate Change Policy

“…This approach might be applied to setting different rules for small and large projects (see section 3.2.2). Hagem (1996), Janssen (1999) and Fischer (2002) also consider the issues of incomplete information, adverse selection and strategic behavior in Joint Implementation. Ausubel et al (2003) develop a mechanism to reveal baselines in an auction context.…”

Technology transfers in the Clean Development Mechanism: an incentives issue

“…Janssen (1999) showed that credible enforcement on behalf of the host government on any cheating host party could guarantee implementation of a CDM contract yielding real emission reductions. The analysis holds for two private sector parties or for the case when the two actors represent national governments, and the terms host party and host country were used interchangeably.…”

“…Even if an early ratification of the Kyoto Protocol were obtained, some specific problems obstruct the implementation of the CDM. Incomplete information limits the efficiency gains from JI (Hagem, 1996), 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. 3 Because of the difficulties to observe the actual emission reductions, both the investing party and the host party have incentives to overstate the emission reductions created by the project: the host party in order to obtain a higher transfer payment, and the investing party in order to maximize the credits earned towards its emission reduction commitment under the Kyoto Protocol.…”

Contracts for Clean Development - The Role of Technology Transfers

“…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.…”