Working Paper

Project-Based Mechanisms for Emissions Reductions: Balancing Trade-offs with Baselines

Aug 23, 2004 | Carolyn Fischer


Project-based mechanisms for emissions reductions credits, like the Clean DevelopmentMechanism, pose important challenges for policy design because of several inherent characteristics.Participation is voluntary, so it will not occur without sufficient credits. Evaluating reductions requiresassigning an emissions baseline for a counterfactual that cannot be measured. Some investments haveboth economic and environmental benefits and might occur anyway. Uncertainty surrounds bothemissions and investment returns, and parties to the project are likely to have more information than thecertifying authority. The certifying agent is limited in its ability to design a contract that would revealinvestment intentions. As a result, rules for benchmarking emissions may be systematically biased tooverallocate, and they also risk creating inefficient investment incentives. This paper evaluates, in asituation with asymmetric information, the efficacy of the main baseline rules currently underconsideration: historical emissions, an average industry emissions standard, and expected emissions.