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Global emissions effects of CDM projects with relative baselines

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  • Strand, Jon
  • Rosendahl, Knut Einar

Abstract

CDM is an offset mechanism designed to reduce the overall cost of implementing a given global target for greenhouse gas (GHG) emissions in Annex B countries of the Kyoto Protocol. A problem with CDM is that it provides incentives to increase, if possible, the baseline emissions for CDM projects, to optimize the value of CDM credits. Under a “relative baselines” crediting rule, the CDM may also unduly increase energy consumption even during the CDM implementation phase. Less than full offset of emissions is then likely, and the CDM will lead to increased global GHG emissions. We show that this is a potentially serious problem, due to asymmetric information between project hosts and the regulator, the CDM Executive Board, and to the basic rules for crediting CDM quotas. In certain cases, the use of “relative baselines” to credit CDM quotas could fully eliminate any emissions reductions achieved by CDM projects. Remedies to overcome the problems are discussed. They may involve setting the baseline independently of initial energy intensity and final output for the project; or involve information revelation mechanisms that minimize policy losses and net rent capture by project sponsors.

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  • Strand, Jon & Rosendahl, Knut Einar, 2012. "Global emissions effects of CDM projects with relative baselines," Resource and Energy Economics, Elsevier, vol. 34(4), pages 533-548.
    • Handle: RePEc:eee:resene:v:34:y:2012:i:4:p:533-548
    DOI: 10.1016/j.reseneeco.2012.05.003
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    References listed on IDEAS

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    2. Trotter, Ian Michael & da Cunha, Dênis Antônio & Féres, José Gustavo, 2015. "The relationships between CDM project characteristics and CER market prices," Ecological Economics, Elsevier, vol. 119(C), pages 158-167.
    3. Strand, Jon, 2013. "Strategic climate policy with offsets and incomplete abatement: Carbon taxes versus cap-and-trade," Journal of Environmental Economics and Management, Elsevier, vol. 66(2), pages 202-218.
    4. Braaten, Ragnhild Haugli & Brekke, Kjell Arne & Rogeberg, Ole, 2015. "Buying the right to do wrong – An experimental test of moral objections to trading emission permits," Resource and Energy Economics, Elsevier, vol. 42(C), pages 110-124.
    5. Knut Rosendahl & Jon Strand, 2015. "Emissions Trading with Offset Markets and Free Quota Allocations," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 61(2), pages 243-271, June.
    6. Liu, Xiaoyu & Cui, Qingbin, 2018. "Value of performance baseline in voluntary carbon trading under uncertainty," Energy, Elsevier, vol. 145(C), pages 468-476.
    7. Beibei Shi & Lei Wu & Rong Kang, 2021. "Clean Development, Energy Substitution, and Carbon Emissions: Evidence from Clean Development Mechanism (CDM) Project Implementation in China," Sustainability, MDPI, vol. 13(2), pages 1-18, January.
    8. Bofinger, Heinrich & Strand, Jon, 2013. "Calculating the carbon footprint from different classes of air travel," Policy Research Working Paper Series 6471, The World Bank.
    9. Strand, Jon, 2016. "Mitigation incentives with climate finance and treaty options," Energy Economics, Elsevier, vol. 57(C), pages 166-174.
    10. Wang, Zhenyu & Fang, Shibiao & Chen, Xiaojian & Sun, Zhilin & Li, Fuqiang, 2015. "Rural hydropower renovation project implementation in China: A review of renovation planning, renovation schemes and guarantee mechanisms," Renewable and Sustainable Energy Reviews, Elsevier, vol. 51(C), pages 798-808.

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