The analysis of country-to-country CDM permit trading using the gravity model in international trade

Abstract

The fairness and effectiveness of the Clean Development Mechanism (CDM) in reducing greenhouse gas emissions and promoting economic development is a matter of substantial concern for the international community as it works towards another GHG reduction agreement in Copenhagen. Among other reasons, the CDM has been criticized as favoring some countries and disfavoring others, resulting in an imbalance in the distribution of development projects, thus undermining one of the original purposes of this institutional arrangement. In this paper, CDM projects were evaluated using econometric models based on international trade theory. Although the CDM suffers from imbalances as have been noted elsewhere, the primary determinant of CDM projects is the total GHG emissions from host and credit countries. GHG emissions in each were positively and consistently related to the CDM projects. Project size and the extent of a host country's infrastructure (such as road, rail lines, airports, electricity supply, telephone and internet connections) were each important determinants. Finally, results are discussed in the context of policy-based action that might limit or otherwise affect CDM implementation after the Copenhagen.