Decision analysis on CDM project investments

The Clean Development Mechanism (CDM) is a mechanism defined in the Kyoto protocol that incentivizes parties to the protocol to fund sustainable development projects in countries that are not party to the protocol. We analyze a target contract financing structure for different CDM projects in order to see under what conditions the financing structure is efficient and to explore the contract's allocation of profit among the firms. In the two broad categories of CDM projects we consider, we find the optimal investment decision for the investor and for the overall system. We also analyze how the residual value of technology would affect the financing, target contract's efficiency and allocation of profit.