Determinants of Unilateral Clean Development Mechanism Project Registration: An Empirical Analysis

Abstract

The Clean Development Mechanism (CDM) was initially designed as a bilateral instrument involving the participation of the private sector in industrialized and developing countries. Developing countries have, however, early on in the negotiations defended the unilateral approach, i.e. self-financing of CDM projects, allowing them direct access to carbon mitigation revenues from the sale of Certified Emission Reduction (CER) units. Unilateral CDM however contributes to an inequitable distribution of projects because countries do not face equal opportunities for CDM investment. To help explain this observation, the paper considers four different indicators to study the link between the level of financial development and unilateral CDM project registration in a sample of 71 developing countries over the period 2005-2011. Results suggest that a determining factor to facilitate self-financing of CDM projects is access to domestic credit in the economy, which could explain why countries with lower capital cost, like South Korea, tend to register more unilateral CDM projects. These results are consistent with the UNFCCC’s initiative to lauch a CDM Loan Scheme to improve CDM access for countries hosting less than 10 projects. The question however still remains open as to how low income countries will be able to implement new market mechanisms at the sectoral level as these will be even more challenging to verify and monitor compared to the current CDM project-based approach.