Clean development mechanism: leverage for development?

The objective of this paper is to show that the investments through the clean development mechanism (CDM) can exert a leverage effect to (i) make attractive to developing countries non-binding commitments and the adoption of national policies and measures; this comes as a guarantee of non-conditionally of the mechanism to strictly environmental concerns and (ii) create a flow of additional investments and technological transfer from Annex B countries to non-Annex B countries. The Indian power sector has been chosen as an example of a sector where institutional barriers, market imperfections, and tariff distortions create a great space for Pareto improvements and leave an important potential for no-regret measures: technological transfer, air conditioned systems, transport infrastructures and removal of subsidies on consumption. This paper presents a micro-economic formalisation on (i) the evolution of profitability of current emitting technologies used in the power sector under the adoption of national policies and measures and (ii) the impact on renewable energy technologies competitiveness of emission credits in the context of CDM. This formalisation has been developed to enable quantitative simulation. A first exercise using the Markal model (used in 77 countries) on the electric sector in India enabled us to simulate the leverage effect of emission credits on additional incomes taken as a proxy for development.