The focus of this thesis is to examine the effect of Clean Development Mechanism on the transition of fossil fuel to carbon-free resource in the hypothetical case of South Africa.
In addition, this study seeks to look into additional policies that could serve as a supplement in ensuring a speed up in the transition of fossil fuel to carbon-free resource when there is endogenous technological change on carbon-free resource, so that, global carbon emission will be reduced in the future due to lower costs of carbon-free resource in the future.
When it comes to intended technology improvement policies, the Clean Development Mechanism (CDM) of the Kyoto protocol seems to be the most popular, and aims to facilitate the investment of clean technology in the developing countries. The mechanism by which this will be achieved is a carbon-free resource cost reduction that will encourage the developing countries to switch from the consumption of fossil fuel (environmentally polluting) to the consumption of carbon-free resource (non-environmentally polluting). This study adopts a simplified theoretical model with an assumption about the technological progress in carbon-free resource. That is, there is learning-by-doing and the unit price on carbon-free resource is a decreasing function of cumulated use of carbon-free resource.
The analysis in this study is however done with respect to five distinct cases. The first case is one with no intervention of CDM, second and third case as one with introduction of CDM in a perfect (known business as usual) and imperfect scenario (unknown business-as-usual) respectively. While the fourth and fifth case is one with the intervention policy having a direct effect on the increase in the rate of equilibrium producer price on fossil fuel and on the decrease in the price on carbon-free resource in the hypothetical case of South Africa respectively.
The analysis in this study can be applied to any developing countries but South Africa as a developing country is examined here for simplicity and in order to see specifically the effect of CDM on the switch between fossil fuel and carbon-free resource. Also, taking South Africa as a case study among other developing countries is more interesting because of its well-known large coal (fossil fuel) reserves.
The simulation result in this study points out to three basic regimes that has been captured when there was no intervention of technology improvement policy (CDM). Regime 1 as consumption of fossil fuel solely, regime 2, as consumption of both fossil fuel and carbon-free resource and regime 3 as consumption of only carbon-free resource.
In Comparing the findings of the perfect case and imperfect case of CDM, the simulation result show that, there is no much of a difference when business as usual is known (perfect case) and when business as usual (BAU) is overestimated (imperfect case). Although overestimating BAU may result in an additional profit gain to South Africa.
Moreover, the simulations in this study show that, the introduction of CDM will reduce the fossil fuel consumption and bring carbon-free resource consumption to an early stage. While with the intervention of policy that have a direct effect on the equilibrium producer price of fossil fuel and the price on carbon free resource, the transition from fossil fuel to carbon free resource becomes faster.
Finally, the analysis in this study reveals that the registration of CDM project should continue in the developing countries, since it is a good technology improvement policy which guides the choice of energy technologies in the developing world in speeding up the transition of fossil fuel to carbon-free technology. However, consideration of any other policy that will have a direct effect on the price of carbon free resource and of fossil fuel might serve as a supplement in enhancing the speed up of the transition of fossil fuel to carbon-free resource in the developing country