Optimal liability apportionment in programmatic credit-based emissions trading

Katja S. Halbritter and Markus Ohndorf

Climate Policy, 2012, vol. 12, issue 4, 440-452

Abstract: The inclusion of Programmes of Activities (PoAs) within the Clean Development Mechanism (CDM) has been limited by the fact that third-party project validators, who determine the eligibility of a CDM Project Activity (CPA), are currently held liable for any certificates that are erroneously issued. As such, validators must replace any credits issued for the relevant CPA. Moreover, the risk associated with the validation of small-scale CPAs is considerably higher than that associated with traditional CDM projects. Using a simple game-theory model to model the interactions between project validators and coordinators, it is shown that shifting liability for certificates that are erroneously included - from the former to the latter - is never optimal, does not provide a strong enough incentive to enforce first-best levels of due care in CPA selection and inclusion, and can induce overprovision in validation efforts. The main problem with such a simple proportionate liability regime is that an increase in incentives for one player automatically leads to a decrease in incentives for the other. Two additional instruments are also considered that would both rectify this problem and improve the environmental integrity of the CDM mechanism.

Date: 2012
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DOI: 10.1080/14693062.2012.669095

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