Discounting the Clean Development Mechanism

This Note proposes discounting the value of emission credits generated from the Kyoto Protocol's flexibility mechanisms - the Clean Development Mechanism (CDM) and Joint Implementation (JI) - to promote more efficient, equitable, sustainable, and carbon-negative projects abroad. The paper begins by exploring the economics, flaws, and inefficiencies of these two mechanisms, finding them to be an inadequate solution to global climate change as they lead to insufficient and inefficient greenhouse gas reductions. The CDM and JI promote insufficient emissions reductions by allowing industrialized nations to swap domestic emissions for corresponding reductions in the developing world without any net global greenhouse gas reductions. Secondly, the two mechanisms award emissions reduction credits based off the global warming potential of the greenhouse gases reduced, rather than the costs of abatement, which can lead to gross market distortions. More critically, it allows industrialized nations to satisfy a large share of their Kyoto obligations by investing in a few isolated super-pollutant projects, thereby depriving the developing world of the necessary low-carbon technology transfer and improvements in sustainable development promised under the Kyoto Protocol.In response to these flaws, the author proposes quot;discountingquot; or reducing the number of emissions credits issued for a project, while maintaining the same level of actual emission reductions, thereby promoting net greenhouse gas reductions. Specifically he proposes discounting the value of credits generated by CDM and JI projects to more closely reflect the project's marginal cost of abatement and transactional costs. The Note proposes creating an expert panel to the CDM and JI, tasked with the duty of discounting the value of emissions credits to more closely reflect the marginal costs of abatement for various pollutants, projects, and host countries. The author concludes that so long as an international discounting scheme provides sufficient certainty, flexibility, and profits for foreign investment, dramatic emissions reductions will likely result