Association for Public Policy Analysis & Management

In this paper we study the Kyoto Protocol’s Clean Development Mechanism (CDM) using data on all Chinese wind energy projects constructed through the end of 2012. The CDM was designed to complement the Kyoto Protocol by offering to Annex B Parties that took on emission reduction obligations an alternative set of abatement opportunities in developing countries based on projects that established emissions reductions that would not have occurred otherwise. The Chinese wind sector was one of the largest national sectors for CDM activity but little is known about the effect of CDM finance on this sector due to previously unavailable data and challenges associated with wind resource forecasting that we are able to overcome.

We begin by presenting the first systematic evidence on the pervasiveness of the CDM in the Chinese wind sector. We find that 80% of Chinese wind projects from 2007-2012 (a period which saw China become the world’s largest market for wind) received financing through the CDM. As a project-based offsetting mechanism, CDM projects must establish their additionality – that they would not have been constructed without the financial support from the Mechanism – and although additionality claims are verified by a third-party auditing board, calculations depend on constructing a counterfactual based on several untestable assumptions and estimates, such as future wind resource quality and the carbon content of displaced electricity.

We evaluate the claims of additionality of projects funded by the CDM with several approaches. First, we match projects that did and did not receive CDM financing based on all observable project characteristics and find that more than half of CDM projects match closely with non-CDM projects, which are non-additional by definition. We then proceed to more sophisticated approaches that model the internal rate of return of a wind farm, a one-number-summary of the project’s profitability and the key decision variable implemented by CDM auditors. We find that the mean and the distribution of internal rate of return for CDM and non-CDM projects is strikingly similar, and that this similarity holds for the duration of panel.

Our results imply that a large fraction of Chinese wind projects financed through the CDM would have been built in the absence of the CDM, and that the credits generated in this sector, amounting to 3 years of emissions reductions in the European Union Emissions Trading Scheme, did not represent actual emissions reductions. Our research confirms what many stakeholders and experts in the Chinese wind sector and the CDM have suggested: that the CDM approval process was co-opted to drive large amounts of climate finance to develop the Chinese wind sector. While we find that the project-based criteria for establishing additionality were not met (and therefore the costly process for establishing each project’s additionality was largely futile), we cannot estimate the plausibly large effect that the financing driven by the CDM had on the Chinese wind sector as a whole.