Joint implementation of greenhouse gas abatement under the Kyoto protocol's 'clean development mechanism': Its scope and limits

The Kyoto Protocol on climate change includes four flexibility mechanisms, which pursue lower-cost global reduction of greenhouse gas emissions through voluntary international re-distribution of abatement effort. We consider the operation of one of these, the Clean Development Mechanism (CDM), which grants transferable credit for abatement achieved by individual projects in countries without national emission targets. An uncredited pilot phase in effect since 1995 provides only limited guidance for projecting the operation of the credited CDM. Under the CDM, intractable difficulties of accounting for project-level effects are likely to bias project activity toward particular project types for which exaggeration-resistant accounting rules are most readily available. This bias will favor retrofits over new investments, and will consequently limit the CDM to a modest contribution to required abatement in developing countries. Use of CDM credits as instruments of domestic policy in investor countries, as well as instruments of international policy, may mitigate this bias and the associated limitation. So may the use of projects based on novel technologies of carbon management.