A Formal Model on How the Clean Development Mechanism of the Kyoto Protocol Produces Perverse Effects

Abstract

One of the main environmental problems in the contemporary society is global warming. In 1997, as a result of negotiations on that issue, several countries signed the Kyoto Protocol that institutes the Clean Development Mechanism (CDM) as an ancillary instrument to decrease the global emissions of greenhouse gases (GHG). We argue that the current CDM design, contrary to many suppositions, produces the perverse effect of increasing the global emissions of GHG. In this study we propose a formal model to support our central argument. Initially, we use game theory to formalize our explanation about how the two players (Kyoto Protocol ANNEX1 and NON-ANNEX1 countries) cooperate by such mechanism, in a non-zero sum game. Eventually, microeconomic theory is used to model the dynamic of interactions of Carbon Tradable Offsets (CTO) buyers and sellers, thereby demonstrating that the cooperation between players produces the perverse effect. This explanatory study used rational choice theory and gathered data in books, scientific articles and official documents purposing to figure out how the CDM works and to support the argument. The main conclusion of our model is that after the CTO demanded quantity be supplied, NON-ANNEX1 countries will use the revenue from CTO markets to increase their productive capacity, so that there will be a turn over in the engagement for reducing GHG emissions by these countries, and the perverse effect of global increasing at such emissions level will follow.