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Simple model frameworks for explaining inefficiency of the clean development mechanism, Volume 1
 
Author:Rosendahl, Knut Einar; Strand, Jon; Country:World;
Date Stored:2009/05/13Document Date:2009/05/01
Document Type:Policy Research Working PaperSubTopics:Energy Production and Transportation; Environmental Economics & Policies; Environment and Energy Efficiency; Transport Economics Policy & Planning; Energy and Environment
Language:EnglishRegion:The World Region
Report Number:WPS4931Collection Title:Policy Research working paper ; no. WPS 4931
Volume No:1  

Summary: The Clean Development Mechanism (CDM) is an offset mechanism designed to reduce the overall cost of implementing a given global target for greenhouse gas (GHG) emissions in industrialized "Annex B" countries of the Kyoto Protocol. This paper discusses various ways in which CDM projects do not imply full offset of emissions, thus leading to an overall increase in global GHG emissions when considering the Annex-B emissions increase allowed by the offsets. The authors focus on two ways in which this may occur: baseline manipulation; and leakage. Baseline manipulation may result when agents that carry out CDM projects have incentives to increase their initial (or baseline) emissions in order to optimize the value of CDM credits. Leakage occurs because reductions in emissions under a CDM project may affect market equilibrium in local and/or global energy and product markets, and thereby increase emissions elsewhere. Remedies against these problems are discussed. Such remedies are more obvious for the baseline problem (where one is simply to choose an exogenous baseline independent of the project) than for the leakage problem (which is difficult to prevent, and where a prediction of the effect must rely on information about overall market equilibrium effects).

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