The effects of leadership in Clean Development Mechanism low-carbon operations

Abstract

The Clean Development Mechanism (CDM) is an international carbon trading mechanism linking Annex I (industrialized) countries to non-Annex I (developing) countries. This paper conducts a research that an investor from an Annex I country provides a clean technology to a host firm in a non-Annex I country to achieve carbon permits which are sold back to the Annex I countries. By developing an investor-as-leader model and a host-as-leader model, this paper investigates how investment levels, prices, and profits are influenced by different leaderships. It is found that although an investor can drive the carbon reduction project and benefit from its power in CDM, the host firm always prefers to be the leader while the investor may prefer to be the follower if the customers are sufficiently green-sensitive. A high green sensitivity improves the cooperation level and helps the two parties reach an agreement in terms of leadership. Also, the designed coordination mechanisms can effectively improve the system’s performance. Further, over intervention by the host government would result in adverse effects on the CDM technology investment and profits.