Cross Border Abatement and Its Welfare Effects

This paper examines the Clean Development Mechanism (CDM) of the Kyoto Protocol and the mechanism's welfare implications for the countries engaging in it. I use a simultaneous public good game, the public good being emission abatement, to asses the impact of the CDM on the emission abatement equilibrium and on the participating countries' welfare. This paper considers three different cases. First, it presents a benchmark case without CDM. Then follow two cases with CDM, which differ in their cost functions: in one case a preferential right for emission abatement is granted to Annex I countries, in the other case it is granted to Non-Annex I countries. This paper finds that the CDM is welfare increasing, but welfare under the CDM depends on who is granted the preferential right