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Transaction costs and the clean development mechanism

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  • Bruce P. Chadwick

Abstract

The emissions trading provisions of the Kyoto Protocol and its clean development mechanism (CDM) are designed to permit greenhouse gas (GHG) emission reductions at the lowest cost globally. However, to ensure climate integrity, these reductions must pass through vigilant approval, monitoring and evaluation procedures that create additional transaction costs unrelated to the physical process of eliminating GHGs. Moreover, the CDM's additionality criterion creates constraints that magnify the influence of these transaction costs on project viability. If these costs are extreme, they could undermine the success of the CDM, and possibly of the Kyoto Protocol itself. This article describes the trading provisions of the treaty, creates a working definition of transaction costs, and discusses their effects. It then analyzes the process of creating a CDM project to identify the sources of transaction costs, illustrated by an example of a fuel substitution project in Ghana. The conditions for project profitability are analyzed and compared with recent GHG emission credit prices in Europe. The specific Ghanaian results are not generalizable to all CDM projects, but the model does suggest a template that can be used to analyze the effects of project and transaction costs in other contexts.

Suggested Citation

  • Bruce P. Chadwick, 2006. "Transaction costs and the clean development mechanism," Natural Resources Forum, Blackwell Publishing, vol. 30(4), pages 256-271, November.
    • Handle: RePEc:wly:natres:v:30:y:2006:i:4:p:256-271
    DOI: 10.1111/j.1477-8947.2006.00126.x
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    1. R. H. Coase, 2013. "The Problem of Social Cost," Journal of Law and Economics, University of Chicago Press, vol. 56(4), pages 837-877.
    2. Krey, Matthias, 2004. "Transaction costs of CDM projects in India: An empirical survey," HWWA Reports 238, Hamburg Institute of International Economics (HWWA).
    3. Krey, Matthias, 2004. "Transaction Costs of CDM Projects in India - An Empirical Survey," Report Series 26112, Hamburg Institute of International Economics.
    4. Michaelowa, Axel & Jotzo, Frank, 2005. "Transaction costs, institutional rigidities and the size of the clean development mechanism," Energy Policy, Elsevier, vol. 33(4), pages 511-523, March.
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    1. Bortoletto, Wagner Wilson & Pacagnella Junior, Antonio Carlos & Cabello, Otavio Gomes, 2023. "Exploring the scientific literature on clean development mechanisms: A bibliometric analysis," Energy Policy, Elsevier, vol. 183(C).

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