Economics
According to Burniaux et al., 2009, p. 37, crediting mechanisms like the CDM could play three important roles in climate change mitigation :
- Improve the cost-effectiveness of GHG mitigation policies in developed countries
- Help to reduce "leakage" (carbon leakage) of emissions from developed to developing countries. Leakage is where mitigation actions in one country or economic sector result in another country's or sector's emissions increasing, e.g., through relocation of polluting industries from Annex I to non-Annex I countries (Barker et al., 2007).
- Boost transfers of clean, less polluting technologies to developing countries.
According to Burniaux et al. (2009, p. 37), the cost-saving potential of a well-functioning crediting mechanism appears to be very large. Compared to baseline costs (i.e., costs where emission reductions only take place in Annex I countries), if the cap on offset use was set at 20%, one estimate suggests mitigation costs could be halved. This cost saving, however, should be viewed as an upper bound: it assumes no transaction costs and no uncertainty on the delivery of emission savings. Annex I countries who stand to gain most from crediting include Australia, New Zealand, and Canada. In this economic model, non-Annex I countries enjoy a slight income gain from exploiting low cost emission reductions. Actual transaction cost in the CDM are rather high, which is problematic for smaller projects. This issue is addressed by the Program of Activities (PoA) modality.
Read more about this topic: Clean Development Mechanism
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