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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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Bibliographic Info

Article provided by Elsevier in its journal Resource and Energy Economics.

Volume (Year): 34 (2012)
Issue (Month): 4 ()
Pages: 533-548

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Handle: RePEc:eee:resene:v:34:y:2012:i:4:p:533-548

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Web page: http://www.elsevier.com/locate/inca/505569

Related research

Keywords: Clean development mechanism; Greenhouse gas emissions; Offset markets; Relative baselines; Baseline manipulation;

References

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  1. Fischer, Carolyn, 2005. "Project-based mechanisms for emissions reductions: balancing trade-offs with baselines," Energy Policy, Elsevier, vol. 33(14), pages 1807-1823, September.
  2. Greiner, Sandra & Michaelowa, Axel, 2003. "Defining Investment Additionality for CDM projects--practical approaches," Energy Policy, Elsevier, vol. 31(10), pages 1007-1015, August.
  3. Franz Wirl & Claus Huber & I.O Walker, 1998. "Joint Implementation: Strategic Reactions and Possible Remedies," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 12(2), pages 203-224, September.
  4. Strand, Jon, 2010. "Carbon offsets with endogenous environmental policy," Policy Research Working Paper Series 5296, The World Bank.
  5. Cathrine Hagem, 1996. "Joint implementation under asymmetric information and strategic behavior," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 8(4), pages 431-447, December.
  6. Knut Einar Rosendahl & Jon Strand, 2011. "Carbon Leakage from the Clean Development Mechanism," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 27-50.
  7. Axel Michaelowa & Michael Dutschke, 1998. "Interest groups and efficient design of the Clean Development Mechanism under the Kyoto Protocol," International Journal of Sustainable Development, Inderscience Enterprises Ltd, vol. 1(1), pages 24-42.
  8. Dutschke, Michael & Michaelowa, Axel, 1998. "Interest groups and efficient design of the clean development mechanism under the Kyoto Protocol," HWWA Discussion Papers 58, Hamburg Institute of International Economics (HWWA).
  9. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, December.
  10. M. Germain & A. Magnus & V. Steenberghe, 2007. "How to design and use the clean development mechanism under the Kyoto Protocol? A developing country perspective," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 38(1), pages 13-30, September.
  11. Hagem, Cathrine, 2009. "The clean development mechanism versus international permit trading: The effect on technological change," Resource and Energy Economics, Elsevier, vol. 31(1), pages 1-12, January.
  12. World Bank, 2010. "10 Years of Experience in Carbon Finance : Insights from Working with the Kyoto Mechanisms," World Bank Other Operational Studies 2873, The World Bank.
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Cited by:
  1. Knut Einar Rosendahl & Jon Strand, 2014. "Emissions Trading with Offset Markets and Free Quota Allocations," CESifo Working Paper Series 4603, CESifo Group Munich.
  2. Bofinger, Heinrich & Strand, Jon, 2013. "Calculating the carbon footprint from different classes of air travel," Policy Research Working Paper Series 6471, The World Bank.

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