International Carbon Finance and the Clean Development Mechanism

Abstract:

This chapter examines international carbon finance and the clean development mechanism (CDM) as important components of the global deal on climate change. It considers two key issues: what mechanisms should be employed to raise the necessarily funds and how those funds should be allocated. The chapter first describes the design of an international carbon-finance framework for the 2012–2020 period, with particular emphasis on CDM reform and its complements and substitutes. It then explains how the CDM works and reviews its performance to date. It also looks at the challenges faced by the international carbon-finance framework and highlights three key areas where the CDM has been less than perfect: environmental integrity, scale, and the provision of ‘carbon leverage’ to maximise the carbon ‘bang for buck’. Finally, the chapter discusses possible future directions of the carbon-finance framework, including incremental reform options such as Certified Emission Reductions discounting and sectoral approaches.