IDEAS home Printed from https://ideas.repec.org/a/wly/sustdv/v31y2023i5p3443-3458.html
   My bibliography  Save this article

Valuing investments in the Global Carbon Market Mechanism as compound real options: Lessons from the Clean Development Mechanism

Author

Listed:
  • Danny Cassimon
  • Peter‐Jan Engelen
  • Linda Peters
  • Martin Prowse

Abstract

The Global Carbon Market Mechanism (GCMM) aims to incentivize national or sub‐national actors to invest in climate mitigation projects at the same time as limiting the global costs of tackling global warming. Using the worked example of the Clean Development Mechanism (CDM), this article shows that the exact valuation of a mitigation project requires the application of compound real options techniques, as it is able to account for the multi‐staged nature of a project cycle, as well as the two basic sources of uncertainty (the probability of not moving successfully to the next stage of the cycle, technical risk, and the uncertainty related to future emission reduction credit prices, market risk). Using parameters from the global database of registered CDM projects, this article illustrates that longer than projected lead times, higher than projected transaction costs, and higher than projected rates of failure lowered the value of investing in CDM projects considerably, alongside offset prices and their variability. Regulators of and participants within the patchwork of existing emission trading schemes and market mechanisms, including the GCMM (Article 6.4 of the Paris Agreement), could benefit through wider appreciation of the benefits of this valuation method.

Suggested Citation

  • Danny Cassimon & Peter‐Jan Engelen & Linda Peters & Martin Prowse, 2023. "Valuing investments in the Global Carbon Market Mechanism as compound real options: Lessons from the Clean Development Mechanism," Sustainable Development, John Wiley & Sons, Ltd., vol. 31(5), pages 3443-3458, October.
    • Handle: RePEc:wly:sustdv:v:31:y:2023:i:5:p:3443-3458
    DOI: 10.1002/sd.2595
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/sd.2595
    Download Restriction: no
    File URL: https://libkey.io/10.1002/sd.2595?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:sustdv:v:31:y:2023:i:5:p:3443-3458. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://onlinelibrary.wiley.com/journal/10.1002/(ISSN)1099-1719 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.