Securitising risk and the clean development mechanism

Delivery risk is central to pricing carbon offsets, but has been the focus of limited attention in the carbon markets. At the same time, remote regions and promising technologies – desperate for investment – have been underserved by the carbon markets. This paper proposes that the current policy objectives and functions of the Clean Development Mechanism (CDM) be expanded to include arrangements for the securitisation of CDM investments. This approach provides investment incentives for both compliance-bound investors as well as those seeking financial returns. It proposes a CDM guarantee trust that would enable the CDM to target certain project categories, while at the same time distributing risks and returns among these classes of investors.