This dissertation applies economic theory and uses neoclassic environmental economics and public choice in order to draw general lessons for the institutional design of climate policy instruments. The CDM exemplifies the interaction between the administrative and institutional design of market instruments, the presence of information and transaction costs, and the divergence of public versus private interest. These challenges are also present in other contexts such as health care, the insurance sector, and the financial market in general. Effectively dealing with these issues and
their interaction with other policies enables policy-makers and academics to make better public policy choices in the future.
The boundaries of the research are set by the international legal framework of Article 12 of the Kyoto Protocol and the Marrakech Accords, which determined procedures for the CDM. Furthermore, frequent use will be made of guidance by the CDM Executive Board, which has established and changed at times the rules for registering a project within the project cycle (UNFCCC, 1997a, 2001, 2005a, 2005b). Furthermore, this dissertation examines EU legislation governing the EU Emissions Trading Scheme with respect of CDM project credit use (Council of the European Union & European Parliament, 2009).
This study does not address cost-benefit analysis and the scientific debate on target- setting. The adequacy of Kyoto targets and the 2020 targets of the European Union is not disputed and these targets are taken as given. The study also does not address the literature on new market mechanisms and nationally appropriate mitigation actions (NAMAs). The discussion on nationally appropriate mitigation actions on the terminology, typology as well as a common understanding is currently evolving (Upadhyaya, 2012). Sectoral trading and crediting systems, brought forward to address emissions in developing countries and competitiveness and leakage concerns, also fall outside of the scope of this dissertation. All of these mechanisms are not operational at the time of writing of this dissertation and an empirical assessment is therefore not possible.19
In addition, sectoral approaches, while theoretically able to address competitiveness concerns, are practically difficult to implement. Sectoral approaches comprise in essence three options (Baron, Buchner, & Ellis, 2009; Meckling & Chung, 2009):
a) Sectoral crediting: intensity targets operationalized through pre-set CO2/output benchmarks, where the sector receives credits when the benchmark is surpassed,
b) Sectoral trading: fixed targets with ex-ante allocation of allowances and subsequent trading, and
c) Technology approaches: a sectoral technology-based cooperation in research and development and technology transfer
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However, experience with the CDM can and has been used to inform discussions on the design of these instruments. For a good overview of the discussion of sectoral approaches and their strength and weaknesses see Chapter 6 in Karsten Neuhoff (2011).
According to Meckling & Chung (2009, pp. 19–23) the discussion around sectoral approaches is based on the competitiveness agenda of industrialised countries and the technology transfer agenda of developing countries. Industrialised countries and their industries prefer a fixed or intensity targets approach so as to create a level playing field for industry. Fixed targets were consistently rejected by developing countries at both the national and the sectoral level and thus it became apparent that sectoral trading is not a politically feasible option in the medium term. Intensity targets bear the challenge on how to distribute credits after a sector has achieved a particular benchmark. Good performance by companies in a sector can be offset by bad performance by other companies (Baron et al., 2009, p. 23). Thus, intensity targets run the risk of not providing direct incentives for good performance. Furthermore, data gathering and benchmark-setting is less controversial for sectors with homogeneous products such as cement and steel, than it is for instance for chemical products with a large variety of production processes. In addition, Baron et al. (2009, p. 15)caution that the potential credit supply from intensity targets would potentially surpass demand from industrialised countries in the presence of CDM credit supply. This would require a careful assessment of industrialised country targets, and of the interaction with CDM (Baron et al., 2009; Meckling & Chung, 2009). At the same time, sectoral technology cooperation and transfer approaches preferred by developing countries, do not address the industrialised countries’ criteria of cost-minimisation and competitiveness. Summarising, the proposed sectoral approaches do not fulfil simultaneously the interests of both industrialised and developing countries, as the CDM does (Heller, 1996; Wiener, 1999). A further discussion and analysis of sectoral approaches is beyond the scope of this book.
The CDM is only one element in the mix of national and international policies. It is not in the scope of this work to illustrate the interaction of the CDM with other energy- relevant policies, such as fossil fuel subsidies still in existence in several countries (see e.g. Cust & Neuhoff, 2010). Examples will be provided, however, where the interaction with national policies leads to positive or negative effects with regards to the goals of the CDM. The latest developments in the design of the CDM and the EU ETS up to November 1, 2011 are taken into account.20
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Political, legal and economic developments that occurred after this date cannot be taken properly into account in this thesis. Thus, the relevant CDM decisions taken at the UNFCCC conference in Durban in December 2011 have not been addressed here.