Whither the CDM? Investment outcomes and future prospects

Following an abrupt fall in carbon credit prices, 2012 has witnessed a disinterest on behalf of investors in the Clean Development Mechanism (CDM). In this paper, we aim to take a step back and provide an assessment of the CDM through a careful analysis of 6 instrument evaluation criteria. Our study indicates that, despite the important number of projects developed under the CDM, the initial ambition of a scheme that would contribute to sustainable development in developing countries has not materialised. Moreover, the environmental integrity of numerous projects is seriously questioned. Given the interaction of the mechanism with other national policies, notably in the renewable sector, the search of carbon reduction opportunities does not lead to cost-effective abatements. If the CDM governance does not score really well in terms of predictability, the mechanism’s transparency is an example for the development of future climate and development policies at a multilateral level. Finally, the lack of consideration for the demand side of the offset mechanism seriously jeopardises the persistence of this instrument. Therefore, we recommend that any CDM reform considers the demand side, for instance through the setting of a guaranteed minimum price coupled with an obligation of repurchase. One cannot expect progress in host countries if new sources of demand for carbon credits are not rapidly created in developed countries.