Conditional payments for carbon sequestration as a local trading game - A case study from a Tanzanian village

Abstract

The authors apply the game theory principal agent model in which the principal is a donor who seeks to reduce or sequester harmful emission through a system of conditional payments, whereas the agent is a village community. The purpose is to explore strategic interactions between the two actors in the case of Mlumbilo village in Tanzania. Whereas carbon sequestration at minimum cost is an objective for the principal, the village community aims at maximizing the net present value of income from all types of land use. The application of both a multi-objective bio-economic model with detailed biological data and a bargaining game theory model with asymmetric information revealed that the choice of reference level used as a performance benchmark had major implications for the negotiated prices for CO₂. However, the choice of reference level did not affect the cost efficiency of carbon sequestration. Additionally, the outcome of the bargaining model was unique and efficient. The authors conclude that recipient discretion will yield efficient results when the agent trusts that the principal will pay for verified sequestration.

Keywords: Bargaining game; Constrained model; Land use; Nash equilibrium; Pareto optimality.