Kyoto commitments: macro and micro insights on trading and the Clean Development Mechanism

Abstract

The purpose of this paper is twofold. First, we raise some issues related to the expected dimension of the carbon market. This analysis is based on a survey of model results on the implementation of the Kyoto goal with and without reliance on emissions trading. In particular, we consider both the emissions and the financial implications associated with different trading scenarios. Transfers related to international GHG trading might be equivalent to a 400% increase in foreign direct investment to countries with economies in transition. A closer look at the GHG reductions expected from the developing world also suggests that global models may be overly optimistic in their assessment of the contribution of flexibility mechanisms in meeting the Kyoto emission goals. OECD countries may need to rely more on domestic policies to reduce their emissions than what has so far been projected by global models. Second, we use a simple microeconomic model to test the potential contribution of typical power generation technologies in the context of the Clean Development Mechanism. Projects that are defined as additional in terms of the environment but already profitable can bring about significant results at a relatively low price of certified emission reductions. To assume that the contribution of the CDM will come close to what is projected by global models (both for prices and quantities) is to assume that such projects could be credited under the CDM.