Improving the attractiveness of CDM projects through allowing and incorporating options

The paper puts forward a proposal that, within Clean Development Mechanism (CDM) projects, investors be allowed to benefit from options; this will require a CDM rule change. Through the presence of options, the downside risk resulting from low carbon prices and/or low achieved emission reductions on projects can be limited, while any upside resulting from high carbon prices and/or high achieved emission reductions can be taken advantage of. It is demonstrated that the presence of options improves the financial attractiveness of CDM projects, and this is at no detriment to any stakeholder. The flow-on from the proposal is that more CDM projects should be realisable if options are available, and this in turn will lead to reduced global emissions and improved sustainability. The proposal is supported by the necessary theory and is demonstrated on two registered CDM projects, one on hydropower and one on wind power.