Transaction Costs of the Kyoto Mechanisms

Transaction costs will reduce the attractiveness of the Kyoto Mechanisms compared to domestic abatement options. Especially the project-based mechanisms CDM and JI are likely to entail considerable costs of baseline development, verification and certification. The AIJ pilot phase and the PCF programme give indications about the level of these costs. Under current estimates of world market prices for greenhouse gas emission permits, projects with annual emission reductions of less than 50,000 t CO2 equivalent are unlikely to be viable; for micro projects transaction costs can reach several hundred € per t CO2 equivalent. Thus the Marrakech Accord rule to have special rules for small scale CDM projects makes sense, even if the thresholds chosen advantage certain project types; projects below 1000 t CO2 equivalent per year should get further exemptions. An alternative solution with no risk for the environ-mental credibility of the projects would be to subsidise baseline setting and charge lower, subsidised fees for small projects for the different steps of the CDM/second track JI project cycle.

Michaelowa, Axel, Marcus Stronzik, Frauke Eckermann and Alistair Hunt (2003), Transaction Costs of the Kyoto Mechanisms, Climate Policy 3 , 261-278