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The cost structure of the clean development mechanism

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  • Rahman, Shaikh M.
  • Larson, Donald F.
  • Dinar, Ariel

Abstract

This paper examines the cost of producing emission reduction credits under the Clean Development Mechanism. Using project-specific data, cost functions are estimated using alternative functional forms. The results show that, in general, the distribution of projects in the pipeline does not correspond exclusively to the cost of generating anticipated credits. Rather, investment choices appear to be influenced by location and project type considerations in a way that is consistent with variable transaction costs and investor preferences among hosts and classes of projects. This implies that comparative advantage based on the marginal cost of abatement is only one of several factors driving Clean Development Mechanism investments. This is significant since much of the conceptual and applied numerical literature concerning greenhouse gas mitigation policies relies on presumptions about relative abatement costs. The authors also find that Clean Development Mechanism projects generally exhibit constant or increasing returns to scale. In contrast, they find variations among classes of projects concerning economies of time.

Suggested Citation

  • Rahman, Shaikh M. & Larson, Donald F. & Dinar, Ariel, 2012. "The cost structure of the clean development mechanism," Policy Research Working Paper Series 6262, The World Bank.
  • Handle: RePEc:wbk:wbrwps:6262
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    References listed on IDEAS

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    1. Mundle, S. & Shankar,m U. & Mehta, S., 1995. "Incentives and Regulation for Pullution Abatement with an Application to Waste Water Treatment," Papers 63, Asian Development Bank.
    2. David Maradan & Anatoli Vassiliev, 2005. "Marginal Costs of Carbon Dioxide Abatement: Empirical Evidence from Cross-Country Analysis," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 141(III), pages 377-410, September.
    3. Considine , Timothy J. & Larson, Donald F., 2009. "Substitution and technological change under carbon cap and trade : lessons from Europe," Policy Research Working Paper Series 4957, The World Bank.
    4. Gollop, Frank M & Roberts, Mark J, 1985. "Cost-minimizing Regulation of Sulfur Emissions: Regional Gains in Electric Power," The Review of Economics and Statistics, MIT Press, vol. 67(1), pages 81-90, February.
    5. Considine, Timothy J. & Larson, Donald F., 2006. "The environment as a factor of production," Journal of Environmental Economics and Management, Elsevier, vol. 52(3), pages 645-662, November.
    6. Newell, Richard G & Stavins, Robert N, 2003. "Cost Heterogeneity and the Potential Savings from Market-Based Policies," Journal of Regulatory Economics, Springer, vol. 23(1), pages 43-59, January.
    7. Larson, Donald F. & Dinar, Ariel & Blankespoor, Brian, 2012. "Aligning climate change mitigation and agricultural policies in Eastern Europe and Central Asia," Policy Research Working Paper Series 6080, The World Bank.
    8. Bystrom, Olof, 1998. "The nitrogen abatement cost in wetlands," Ecological Economics, Elsevier, vol. 26(3), pages 321-331, September.
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    Keywords

    Climate Change Economics; Climate Change Mitigation and Green House Gases; Energy Production and Transportation; Transport Economics Policy&Planning; Energy and Environment;

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