Efficacy of the Clean Development Mechanism in Reducing Greenhouse Gas Emissions: a theoretical model

Using a theoretical framework, we explain the impact of the Clean Development Mechanism (CDM) on greenhouse gas emissions in Annex I and non-Annex I countries. We show that on one hand, emissions in the non-Annex I country decline because of abatement sponsored by the Annex I country under the CDM; on the other hand, global emissions may increase because (i) the Annex I country increases emissions in its own country after obtaining the Certified Emission Reduction (CER) credits, and (ii) the non-Annex I country crowds out the benefits from the CDM projects by increasing its domestic emissions. For the CDM to be effective in reducing global emissions, we show that partial CER credits should be given to the Annex I country that sponsors CDM projects in the non-Annex I country. We also suggest that the CDM Executive Board should allow the CDM projects to be hosted by the non-Annex I countries that have sufficiently high tolerance for pollution. The model explains why such countries will not expand their production and thus domestic emission in response to abatement sponsored by the Annex I country under the CDM project.