The Clean Development Mechanism under the Kyoto Protocol and the "low-hanging fruits" issue

The Kyoto Protocol has introduced the so-called Clean Development Mechanism (CDM) under which industrialized countries are allowed to fulfill part of their obligations through the use of emission credits generated by emission reduction projects undertaken in developing countries. Developing countries have been reluctant to participate in the CDM, fearing that the CDM will use up most of their cheap abatement options (the low-hanging fruits problem). In this paper we show that developing countries should in general participate in the CDM, unless the credit prices are relatively low. Moreover, these countries always gain by participating in the CDM when banking of credits is allowed. Nevertheless, three effects that are likely to limit the extent of such a participation are identified. A case-study (South Africa) reveals that these effects may play a significant role.