Measuring the Clean Development Mechanism's Performance and Potential (WP #56)

The Kyoto Protocol has entered into force despite US non-participation. One of its key components, the Clean Development Mechanism (“CDM”) is a regime for the creation and trading of greenhouse gas (“GHG”) offsets. An offset is a tradable instrument representing some volume of GHG that the seller has voluntarily agreed not to emit in exchange for the right to sell the offset. A seller will abate her emission of GHG and sell an offset when the cost of not emitting is less than the market price for offsets. A buyer in turn will purchase an offset when its value is less than the cost to him of not emitting some quantity of GHG. In the CDM, offsets are denominated in terms of Certified Emissions Reductions (“CERs”) which represent 1 metric ton of CO2 or its equivalent (“1 t CO2e”). CDM projects must be located in developing nations while CDM buyers are either developed nation governments or private entities. Thus as well as being a market, the CDM is a subsidy from developed to developing nations.