Financing the Reduction of Emissions from Deforestation: A Differential Game Approach

Abstract

This paper analyzes and compares two versions of a mechanism that aims at mitigating climate change through REDD (Reduced Emissions from Deforestation and Forest Degradation). In this mechanism industrialised countries compensate countries with rainforests if they reduce their deforestation, because it is more cost efficient than restricting carbon emissions from domestic production. The initial question is, which funding possibility yields the best environmental results and is most beneficial for the involved parties. For this purpose, differential games are developed, in which industrialized countries and countries with rainforests denote the two players. Solutions are obtained by applying Pontryagin’s Maximum Principle and the concept of Nash and Stackelberg Equilibria. Due to the model assumptions, analytical solutions can be found. It turns out that both versions of the mechanism can be a valuable contribution in the battle against climate change. Moreover, most advantages and disadvantages of the two variants turn out to be robust w.r.t. parameter changes and small modifications of the model.