Addressing market failures in the CDM: A funding-based approach
The CDM was designed to utilize the power of the market to efficiently reduce GHG emissions and promote sustainable development. Unfortunately, market failures resulting from information asymmetries and lack of product homogeneity are preventing the CDM from efficiently allocating resources. The result is that long-term projects, such as public transit projects and renewable electricity generation, as well as projects with high sustainable development value, are not competitive with short-term projects, such as HFC scrubbers, and traditional GHG intensive technologies. Currently, projects which are rationally viable in the absence of these market failures cannot gain the appropriate financing to become sufficiently attractive to incentivize private investment. This paper argues that government funding is a viable solution for correcting these market failures. Examples of uses for funding would be the pre-purchase of CERs or the pooling of smaller projects to lower their transaction cost per CER ratio. By correcting these market failures, the CDM will move closer to achieving its goal of efficiently reducing GHG emissions and promoting sustainable development and this can be achieved without causing the market distortions that often accompany government subsidy programs.