The Cost Structure of the Clean Development Mechanism

This paper examines the cost of
producing emission reduction credits under the Clean
Development Mechanism. Using project-specific data, cost
functions are estimated using alternative functional forms.
The results show that, in general, the distribution of
projects in the pipeline does not correspond exclusively to
the cost of generating anticipated credits. Rather,
investment choices appear to be influenced by location and
project type considerations in a way that is consistent with
variable transaction costs and investor preferences among
hosts and classes of projects. This implies that comparative
advantage based on the marginal cost of abatement is only
one of several factors driving Clean Development Mechanism
investments. This is significant since much of the
conceptual and applied numerical literature concerning
greenhouse gas mitigation policies relies on presumptions
about relative abatement costs. The authors also find that
Clean Development Mechanism projects generally exhibit
constant or increasing returns to scale. In contrast, they
find variations among classes of projects concerning
economies of time.