Strategies for risk management of joint implementation investments

The much needed solution of the joint implementation (JI) paradox requires an effective incentive structure that promotes private investments in JI projects. One key element of this incentive structure is the availability of effective and efficient risk management strategies for JI investments. This article applies theoretical and practical insights from risk management of traditional foreign direct investments to JI investments. To start with, a general framework for the identification of specific JI risks is presented. It is proposed that JI risks could be classified into technological, economic and political risks. Thereafter, several strategies for managing JI project risks like insurance, project diversification and specific structuring of JI investments are discussed. Risk diversification considerations imply that a wide variety of project types and host countries should be eligible for JI investments. Moreover, optimal risk policy will in general require both, emission reduction measures adopted at home as well as abroad via JI. Companies with small JI investment budgets could take advantage of international diversification investing in carbon offset mutual funds. Political risks of JI investments will be alleviated by the creation of positive additional effects of JI projects in the host country.