Environmental Transfers against Global Warming: A Credit-based Program*

This paper investigates the impacts of institutionalizing a credit-based transfer program between developing and developed countries. Such a program is expected to become an essence of the Clean Development Mechanism, which is to be implemented shortly. The provisions of financial and technological transfers are incorporated simultaneously into a dynamic game model of global stock pollution where the efficiency in emission abatement is also described as a stock variable. Our numerical simulation indicates that a credit-based transfer program can be more beneficial for a recipient country as well as for a donor country than a non-credit-based transfer program. This is because, with a credit system, the donor country increases the provisions of both economic and technological transfers and the benefits from their increases overwhelm the welfare loss to the recipient country from a reduction in the donor country’s abatement efforts.