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Clean development mechanism projects and portfolio risks

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  • Matsuhashi, Ryuji
  • Fujisawa, Sei
  • Mitamura, Wataru
  • Momobayashi, Yutaka
  • Yoshida, Yoshikuni

Abstract

Clean development mechanism (CDM) is expected to facilitate technology transfer from developed to developing countries as well as to economically reduce greenhouse gas emissions. In this article, we explore effective institutions to activate CDM projects. For this purpose, we have estimated internal rate of return (IRR) and other indicators on profitability for 42 CDM or JI projects, taking account of volatilities in the price of certified emission reductions (CER). As a result of Monte Carlo simulations, expected values and standard deviations in the IRR of the projects were quantitatively shown. Then we evaluated various risks in CDM, concluding that diversification of investment is an effective way to suppress these risks. Therefore securitization of CDM finance is proposed as a means of facilitating the diversification of investment. Namely, we present the concept of a CDM bond, which is a project bond with CER. We also investigated the role of governments to suppress risks in CDM. Referring to CERUPT, initiated by the Netherlands’ government, the institution of “insured CERUPT” is proposed to suppress downside risks in the IRR of the projects. We concluded that it is possible to make CDM projects viable by the “insured CERUPT” and CDM bond.

Suggested Citation

  • Matsuhashi, Ryuji & Fujisawa, Sei & Mitamura, Wataru & Momobayashi, Yutaka & Yoshida, Yoshikuni, 2004. "Clean development mechanism projects and portfolio risks," Energy, Elsevier, vol. 29(9), pages 1579-1588.
    • Handle: RePEc:eee:energy:v:29:y:2004:i:9:p:1579-1588
    DOI: 10.1016/j.energy.2004.03.060
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    Cited by:

    1. Adhikari, S. & Mithulananthan, N. & Dutta, A. & Mathias, A.J., 2008. "Potential of sustainable energy technologies under CDM in Thailand: Opportunities and barriers," Renewable Energy, Elsevier, vol. 33(9), pages 2122-2133.
    2. Hong, Jin & Guo, Xiumei & Marinova, Dora & Yang, Fengli & Yu, Wentao, 2013. "Clean development mechanism in China: Regional distribution and prospects," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 93(C), pages 151-163.
    3. Hultman, Nathan E. & Pulver, Simone & Guimarães, Leticia & Deshmukh, Ranjit & Kane, Jennifer, 2012. "Carbon market risks and rewards: Firm perceptions of CDM investment decisions in Brazil and India," Energy Policy, Elsevier, vol. 40(C), pages 90-102.
    4. Lee, Hyounkyu & Park, Taeil & Kim, Byungil & Kim, Kyeongseok & Kim, Hyoungkwan, 2013. "A real option-based model for promoting sustainable energy projects under the clean development mechanism," Energy Policy, Elsevier, vol. 54(C), pages 360-368.

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