Clean Development Mechanism - Financial Issues

Financial Issues

With costs of emission reduction typically much lower in developing countries than in industrialised countries, industrialised countries can comply with their emission reduction targets at much lower cost by receiving credits for emissions reduced in developing countries as long as administration costs are low.

The IPCC has projected GDP losses for OECD Europe with full use of CDM and Joint Implementation to between 0.13 and 0.81% of GDP versus 0.31 to 1.50 Climate Change 2001 - Synthesis report. Figure SPM-8] IPCC, 2001 with only domestic action.

While there would always be some cheap domestic emission reductions available in Europe, the cost of switching from coal to gas could be in the order of €40-50 per tonne CO₂ equivalent. CERs from CDM projects were in 2006 traded on a forward basis for between €5 and € 20 per tonne CO₂ equivalent. The price depends on the distribution of risk between seller and buyer. The seller could get a very good price if it agrees to bear the risk that the project's baseline and monitoring methodology is rejected; that the host country rejects the project; that the CDM Executive Board rejects the project; that the project for some reason produces fewer credits than planned; or that the buyer doesn't get CERs at the agreed time if the international transaction log (the technical infrastructure ensuring international transfer of carbon credits) is not in place by then. The seller can usually only take these risks if the counterparty is deemed very reliable, as rated by international rating agencies.