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Carbon Leakage from the Clean Development Mechanism

The Clean Development Mechanism (CDM) is an offset mechanism designed to reduce the overall cost of implementing a given target for greenhouse gas (GHG) emissions in industrialized Annex B countries of the Kyoto Protocol, by shifting some of the emission reductions to Non-Annex B countries. This paper analyzes how CDM projects may lead to leakage of emissions elsewhere in Non-Annex B countries. Leakage occurs because emissions reductions under a CDM project may affect market equilibrium in regional and/or global energy and product markets, and thereby increase emissions elsewhere. We also account for potential reverse or negative leakage effects in Non-Annex B from higher emissions cap in Annex B. Our conclusion is that net leakage typically is positive and sizeable, thus leading to an overall increase in global GHG emissions when CDM projects are undertaken. Leakage is greater when the different fossil fuel markets are more segregated.

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Energy Specializations: Energy and the Environment – Climate Change and Greenhouse Gases; Energy and the Environment – Policy and Regulation

JEL Codes:
Q54 - Climate; Natural Disasters and Their Management; Global Warming
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: carbon tax, liquid fuels, emissions regulation

DOI: 10.5547/ISSN0195-6574-EJ-Vol32-No4-3

Published in Volume 32, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.