The impact of discounting emission credits on the competitiveness of different CDM host countries

Discounting the value of emission credits has been proposed as a possible approach for addressing some of the shortcomings of the Clean Development Mechanism (CDM). It could be used to compensate for non-additional CDM projects; to increase the incentive for advanced developing countries to move from the CDM to own mitigation commitments; and to improve the competitiveness of less developed countries as hosts for CDM projects. We assess the impact of discounting on the distribution of CDM projects in host countries, with a special focus on Least Developed Countries (LDCs). CDM-specific abatement cost curves are built for 4 regions: China, India, other advanced Asian countries and LDCs. Abatement costs are estimated using the information provided in the project documentation of 108 projects from 17 subtypes in 16 host countries. Abatement potentials are derived from the current CDM pipeline for each region. For LDCs, we additionally include an optimistic potential estimation by adding to the current pipeline the potential found by a World Bank study for LDCs in Sub-Saharan Africa. We then assess the effect of two emission credit discounting schemes on these abatement cost curves. Credit discounting is differentiated by host countries, based on an index composed of per capita GDP and per capita emissions. In the first scheme, it only affects the most advanced CDM host countries; in the second one it also affects China. We find that discounting has an impact on the competitiveness of individual CDM host countries in the carbon market, as it affects their abatement cost curves. It could become an instrument for incentivising advanced developing countries to leave the CDM and engage in other farther-reaching climate-related commitments, as a result of the resulting emission credit cost increases. However, even with discounting, LDCs remain unimportant in terms of abatement potential if the financial, technical and institutional barriers to CDM development in these countries are not overcome.