Performance Risk Associated with Renewable Energy CDM Projects

Abstract

The clean development mechanism (CDM), part of the Kyoto Protocol to combat rising carbon emissions, allows projects to proceed in developing countries in return for providing carbon credits to developed countries. The feasibility of CDM projects is commonly justified through a combination of sale of the end product and carbon credits, which have a financial value, generated through carbon emissions avoided. However, the carbon credits assumed or estimated at the feasibility stage may not be realized or achieved on project completion; the issuance of carbon credits may be less than that originally estimated, thereby affecting project feasibility. This paper examines the performance risk associated with the discrepancy between estimated and issued carbon credits. Data for 227 renewable energy projects, comprising hydroelectric and wind power of varying scale and in multiple countries, are examined in establishing the performance risk. The study found that overall, the hydroelectric power projects performed similarly on average to the wind-power projects for both large- and small-sized projects. Generally, estimated certified emission reductions (CERs) were not achieved. However, certain categories (type, scale, host country, monitoring period) performed better than others. The results will be of interest to investors, regulators, and researchers in such energy-carbon projects.