Keywords: clean development mechanism, CDM executive board rejection, market valuation, environmental externalities, CER pricing, carbon emission reduction, CER certificates, carbon trading, India, futures prices
Implied valuation of environmental externalities: a study of investor responses to rejection of Indian CDM project proposals
The project registration process under the Kyoto Protocol/CDM is clearly defined, and rather elaborate, involving approval by the designated national authority ('host country approval') and culminating in the approval and issue of carbon emission reduction certificates by the CDM–executive board (EB). This paper measures the environmental externality embedded in the market valuation of a portfolio of Indian firms whose project proposals had been approved by the national authority in India, but had eventually been rejected by the CDM–EB. It is observed that approval by the host country generally triggers an unambiguous positive response from investors. However, responses on rejection tend to be uncharacteristic and inconsistent and completely divorced from futures prices discovered for issued and traded emission–reduction certificates (CER). A few suggestions are presented to try and explain such anomalous behaviour.