Avoiding perverse effects of baseline and investment additionality determination in the case of renewable energy projects

As part of the international climate negotiations there is a lot of discussion about methodologies for quantifying emission reductions of greenhouse gas reduction projects (baseline discussion) and about granting emission reduction credits only to projects that are additional (Investment Additionality discussion). So far this discussion has been fairly general and has not systematically analysed the impacts on investor decisions. We analyse these impacts for the case of renewable energies and show that the approaches under discussion can all give perverse incentives to invest at unfavourable sites. Thus, higher CO2 abatement costs than without any crediting system might be realised resulting in inefficiencies in climate policy. To overcome this problem we introduce a new Investment Additionality concept and propose to have only one emission reduction factor for each electricity grid.