The monetary compensation mechanism: An alternative to the clean development mechanism

One of the key challenges in resolving global warming problem is how to induce developing countries to reduce emissions. The CDM was proposed in the Kyoto Protocol as a means of obtaining the cooperation of developing countries in controlling greenhouse gases, but it has some intrinsic problems and has generated considerable controversy. This paper presents an alternative mechanism - the Monetary Compensation Mechanism (MCM). I study the characteristics of this mechanism with a dynamic principal-agent model. By solving the model numerically, I obtain the optimal solution for a scenario based on 1990 data. The monetary compensation rate under the MCM is comparable to the price of CERs in the CDM, but the MCM has several advantages over the CDM. (C) 2007 Elsevier B.V. All rights reserved.