Should developing countries participate in the Clean Development Mechanism under the Kyoto Protocol ? The low-hanging fruits and baseline issues

Under the Kyoto Protocol, industrialized countries committed to emission reductions may fullfil part of their obligations by implementing emission reduction projects in developing countries. In doing so, they make use of the so-called Clean Development Mechansim (CDM). Two important issues surround the implementation of the CDM. First, if the cheapest abatment measures are implemented for CDM projects, developing countries may be left with only more expensive measures when they have to meet their own commitments in the future (the so-called low-hanging fruits issue). Second, a choice must be made on the type of baseline against which emission reductions are measured : an absolute baseline or a relative (to output) one (the baseline issue). The purpose of this paper is to study the interactions between these two issues from the point of view of the developing country. Two major results are obtained. First, when possible future commitments for developing countries and irreversibility of abatement measures are taken into account, we show that the industry where CDM projects are implemented enjoys large profits under an absolute baseline than under a relative one. Second, concerning the low-hanging fruits problem, the financial compensation required by the developing country for implementing ‘too many’ CDM projects is larger under the relative baseline.