Study on Effective Institutions to Make CDM Projects Viable

Abstract

Degradation of the global environment and depletion of resources are becoming serious threats to sustainable development of humankind. In particular, there has been growing concern on climate change caused by increase of greenhouse gases. The CDM (clean development mechanism) is expected to facilitate technology transfer from developed to developing countries, as well as to economically reduce greenhouse gas emissions. This chapter explores effective institutions to make CDM projects viable. For this purpose, internal rate of return (IRR) and other indicators on profitability for 42 CDM or joint implementation (JI) projects were estimated, taking account of volatilities in price of CER, certified emission reduction. As a result of Monte Carlo simulations, expected values and standard deviations in IRR of the projects were shown quantitatively. Various risks in the CDM have been evaluated, concluding that diversification of investment is effective in suppressing these risks. Therefore, securitization of CDM finance was proposed to facilitate the diversification of investment. The chapter also investigates the role of governments in suppressing risks in CDM. Referring to CERUPT, initiated by the Netherlands' government, the institution of insured CERUPT was proposed to suppress the downside risks in IRR of the projects.