Climate Change Control: A Fair Game for All?

1. Climate Change Control:A Fair Gamefor All? Kirill Zavodov and Alvin Tan University of Cambridge

2. “Business as usual” will lead to disaster Kirill Zavodov and Alvin Tan

3. Asymmetries of climate change I Kirill Zavodov and Alvin Tan

4. Asymmetries of climate change II Change in cereal production in developed and developing countries for a doubling of CO2 levels (equivalent to around 3ºC of warming in models used) simulated with three climate models (GISS, GFDL and UKMO Hadley Centre) Source: Economics of Climate Change: The Stern Review Kirill Zavodov and Alvin Tan

5. Kyoto Protocol • Binding emission reductions within the participating countries: • Change in the structure of energy balance • Implementation of energy saving technologies • Flexible mechanisms: • Emissions Trading • Joint Implementation / Clean Development Mechanism Kirill Zavodov and Alvin Tan

6. Joint Implementation (JI) Projects I • JI projects as a platform for reducing greenhouse gas emissions • More cost-effective meeting of GHG targets • Something of value for developing countries • Diffusion of “green” technologies • Spillover benefits in the form of greater future investments Kirill Zavodov and Alvin Tan

7. Joint Implementation (JI) Projects II • Issues of sovereignty • Economic ploy • Problems with measuring the baseline • “Low-hanging fruit” • Disparity of bargaining power! Kirill Zavodov and Alvin Tan

8. The Model I • Assumptions • Two firms: one from developed country (sponsor) and the other from a developing country (host) • A “two-state” world • Perfect information • Risk Neutrality • No cost incurred in waiting or inaction • (baseline, in the absence of JI/CDM projects, can be correctly estimated, ex post) Kirill Zavodov and Alvin Tan

9. The Model II • Go-alone setting: • H is eligible for implementation of emission abatement technology • If successful, gains a carbon tax reimbursement • Total costs = investment costs + implementation costs • JI/CDM project setting: • S can reduce emissions in the country of H cheaper than in her own country • Total cost = investment costs (borne by S) + implementation costs (borne by H) Kirill Zavodov and Alvin Tan

10. First Results (JI/CDM project) u V π + S H p H Blocking region of the project sponsor above this line Blocking region of the project host below this line Kirill Zavodov and Alvin Tan

11. Optionality • Option • A contract that provides the owner with a right but not an obligation to undertake a business decision • Non-cooperative option • A cooperative game followed by a non-cooperative game Kirill Zavodov and Alvin Tan

12. Opt-out clause u V π + S H p H Blocking region of the project sponsor above this line The core of the game The project host will opt out of ERUs’ marketing scheme to south-west of these lines Blocking region of the project host below this line Kirill Zavodov and Alvin Tan

13. Considerations • Opt-out clause vs Tax • Chinese government levied a tax of 65% on JI projects • Perfect information: Our model would prove to be more efficient for the host country as compared to the tax • Asymmetries of information • This relaxes one of the assumption of the model • “Moral hazard” on the part of the host • Can be mitigated through imposing a “minimum requirement” on the quantity of ERUs to be produced by the host before the opt-out clause can be used Kirill Zavodov and Alvin Tan

14. Conclusions • Global Warming/Climate Change is a very real problem • Developing countries are not getting a fair deal • Situation can be improved by: • Promoting effective cooperation via the inclusion of an option structure within the contract Kirill Zavodov and Alvin Tan

15. Thank you for your attention! E-mail: kvz20@cam.ac.uk Kirill Zavodov and Alvin Tan