COOPERATION TO REDUCE DEVELOPING COUNTRY EMISSIONS

Without effective developing country (DC) participation in climate mitigation, it will be impossible to meet global concentration and climate change targets. However, DCS are unwilling and, in many cases, unable to bear the mitigation cost alone. They need huge transfers of resources — financial, knowledge, technology and capability — from industrialized countries (ICs). In this paper, we evaluate instruments that can induce such resource transfers, including tradable credits, mitigation funds and results-based agreements. We identify key constraints that affect the efficiency and political potential of different instruments, including two-sided private information leading to adverse selection; moral hazard and challenging negotiations; incomplete contracts leading to under-investment; and high levels of uncertainty about emissions paths and mitigation potential. We consider evidence on the poor performance of current approaches to funding DC mitigation — primarily purchasing offsets through the Clean Development Mechanism — and explore to what extent other approaches can address problems with offsets. We emphasize the wide spectrum of situations in DCS and suggest that solutions also need to be differentiated and that no one policy will suffice: some policies will be complements, while others are substitutes. We conclude by identifying research needs and proposing a straw man to broaden the range of "contracting" options considered.