Equilibrium Investment Strategies in Foreign Environmental Projects

This paper proposes a two-player, finite-horizon differential game model to analyze joint implementation in environmental projects, one of the flexible mechanisms considered in the Kyoto Protocol. Using a nonlinear specification for the damage costs, we show that, if joint implementation is available, both players will invest in environmental projects in their own location and one of the players will invest abroad, the identity of that player changing at most once during the planning horizon.Communicated by G. LeitmannResearch supported by FQRSC, Quéebec and NSERC, Canada. The second author’s research was partially supported by MEC under Project SEJ2005-03858 and by JCYL under Project VA045A06, confinanced by FEDER funds.