Cross Border Abatement and its Welfare Effects

This paper examines the Clean Development Mechanism (CDM) of the Kyoto Protocol and its welfare implications for the countries engaging in it. It uses a simultaneous public good game, the public good being emission abatement, to asses the impact of the CDM on the public good provision equilibrium and on the countries' welfare. Three different cases are considered in this paper. First, a benchmark case without CDM is presented. This is followed by two cases with CDM, which differ in their cost functions: in one a preferential right for emission abatement is granted to Annex I, in the other to Non-Annex I countries. In general, the CDM is welfare increasing, but welfare under the CDM depends on who is granted the preferential right.