Project-Based Instruments: Economic Consequences of the Kyoto and Buenos Aires Framework and Options for Future Development

Abstract

The implementation of activities aimed to mitigate global greenhouse gas emissions is more cost-efficient in developing countries than in most of the industrialized world. Thus the Kyoto Protocol allows industrial countries to finance emission reductions in developing countries through the clean development mechanism (CDM). It also allows joint implementation (JI) between industrialized countries. Both instruments will likely attract billions of dollars per year. Nevertheless, there are differences that will impact on the attractiveness of the instruments and might lead to a lower flow of funds to developing countries than expected. The major differences are the early crediting of CDM reduction while JI is not subject to an adaptation tax. On the basis of the Protocol one cannot decide which instrument is more attractive — that remains open and will depend on the decisions of future rounds of negotiation that might align the two mechanisms. It depends particularly on the decision whether the CDM will allow unilateral, bilateral or only multilateral project implementation. Moreover, the attractiveness of both mechanisms depends on the stringency of baseline methodologies.