Perverse incentives under the CDM: a comment
Working Paper 53
The Clean Development Mechanism (CDM) provides some basic safeguards to ensure that HFC-23 reductions are additional, primarily aimed at establishing a realistic baseline scenario for HFC-23 projects.
However, there have long been doubts about the additionality of HFC-23 projects (Wara, 2007a,b). Now Schneider (2011), in an excellent article in Climate Policy, presents compelling empirical evidence that these HFC-23 safeguards have been been unsuccessful. In fact, the evidence shows that the CDM appears to have created perverse incentives to increase the HFC-23 production.
Schneider provides systematic empirical analysis on a question that so far has been dominated by suspicion and speculation. It is a paper that deserves to be read.
Proposals aimed to mitigate the ‘additionality problem’ often focus on getting the baseline right (Geres and Michaelowa, 2002; Begg and der Horst, 2004). Schneider also argues that “the key deficit of the current methodology is that it implicitly assumes that plants would continue to operate at or above historically observed HFC-23/HCFC-22 ratio” (Schneider, 2011, p. 855). He proposes that CERs should only be issued for a proportion of HFC-23 emissions reductions.
However, this comment will argue that the perverse incentives in the CDM are the result of a more fundamental institutional failure.
This comment explains the underlying perverse strategic incentives built into the CDM, and re-considers the question of to reform the CDM.