The contribution of the Clean Development Mechanism to national climate policies

The clean development mechanism (CDM), one of the flexible mechanisms of the Kyoto Protocol, has not received noticeable attention in the applied modeling literature. In this paper we develop a policy-oriented trading model explicitly including the key features likely to influence the supply and demand of CDM projects. This model allows us to evaluate the contribution of the CDM to climate policies at the national level. With an application to Belgium we show that the CDM could reduce the cost of the Kyoto Protocol by a factor 10. Policy analyses reveal that some features (e.g. the market share) have much more influence on this result than others (notably the transaction costs). Moreover, equilibrium effects can sometimes exceed direct effects so that, all in all, a larger domestic abatement could be justified by the desire to reduce what we call carbon dependence. Policy implications and perspectives for the CDM are discussed.