JOINT IMPLEMENTATION - STRATEGIC REACTIONS AND POSSIBLE REMEDIES

This paper investigates the promising proposal of Joint Implementation (JI) to mitigate greenhouse gas emissions. This was ultimately the on ly concrete outcome of the Conference on Climate Change in Berlin, alb eit restricted to a pilot phase. The basic idea, given the public's aw areness of global warming, sounds economically plausible: The industri alized countries, the only ones required to stabilize and lower carbon emissions, can search for cheaper reductions of greenhouse gas emissi ons in developing countries and economies in transition. However, this proposal leads to strategic reactions by developing countries reinfor ced by the fact that this cheating coincides with the interest of the industrialized country. In short, this proposal will lead to cheating (given asymmetric information) and will thus produce largely faked red uctions in emissions. On the constructive side, an efficient mechanism retaining the spirit of JI is derived, which deters strategic reactio ns. This differs from a usual principal-agent problem through an addit ional hierarchical layer: a global authority (e.g. the Conference of P arties on Climate Change), an industrialized country and a developing country. The unavoidable loss that is even associated with an optimal scheme due to strategic, behavioural reality (the first best optimum i s unattainable, except at the top) leads, of course, to much less glam orous predictions in emission reductions. Moreover, the implicit subsi dization scheme focuses and favours on already 'efficient' partners.