Leveraging private capital for climate mitigation: Evidence from the Clean Development Mechanism

- We study how states can leverage private capital for climate mitigation under the CDM.
- Contracting mode (unilateral versus bilateral) shapes private investment.
- Empirically, we analyze 3749 Clean Development Mechanism projects, 2003-2011.
- Unilateral implementation draws more private capital when climate mitigation is costly.
- For carbon market design, investment incentives and political risk cannot be ignored.

To mitigate climate change, states must make significant investments into energy and other sectors. To solve this problem, scholars emphasize the importance of leveraging private capital. If states create institutional mechanisms that promote private investment, they can reduce the fiscal cost of carbon abatement. We examine the ability of different international institutional designs to leverage private capital in the context of the Kyoto Protocol's Clean Development Mechanism (CDM). Empirically, we analyze private capital investment in 3749 climate mitigation projects under the CDM, 2003-2011. Since the CDM allows both bilateral and unilateral implementation, we can compare the two modes of contracting within one context. Our model analyzes equilibrium private investment in climate mitigation. When the cost of mitigation is high, unilateral project implementation in one host country, without foreign collaboration, draws more investment than bilateral contracting, whereby foreign investors participate in the project.