An Essay on a Real Option and Game-Theoretic Approach toward a Valuation of GHG Emission Rights in Climate Change

Abstract

The purpose of this paper is to consider a valuation of GHG emission rights, especially CERs from CDM projects with a real option and game-theoretic approach. There has been no study that tried to prove a valuation of them with a real option and game-theoretic approach. The following results were obtained: (1) In a CDM project, an underdeveloped country shirks in a project when a developed country will get all emission rights in the contract. (2) a value of CERs from CDM projects is affected by following factors: (a) a market price of emission rights, (b) the ratio of allocation of CERs between an underdeveloped country and a developed country in CDM contracts, (c) the ratio of the market share which an underdeveloped country gets from a developed country in other products markets because of know-how which an underdeveloped country gets in CDM projects, (d) initial costs of CDM projects which a developed country must pay, and (e) the probability that an underdeveloped country and a developed country get CERs when an underdeveloped country works hard in CDM projects.