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Reporting Bias and Monitoring in Clean Development Mechanism Projects

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  • Hui Chen
  • Peter Letmathe
  • Naomi Soderstrom

Abstract

The Clean Development Mechanism (CDM) is a flexible carbon market mechanism managed by the United Nations. The program grants tradable carbon emissions credits (Certified Emission Reductions) for carbon‐reducing projects in developing countries. A project can only be admitted to the program if it is not financially profitable, and thus would not take place without the emission credits granted through the CDM. In this paper, we examine how monitoring reduces incentives of companies to bias the reported expected financial viability of potential CDM projects to gain admission to the program. We find that reported rates of return, which are a key factor for admission to the program, tend to be downwardly biased and are negatively associated with the expected benefits stemming from forecasted greenhouse gas reductions. However, monitoring from various sources mitigates some of the distorted incentives and related reporting bias. Furthermore, the monitoring effect becomes much stronger after 2008, when the CDM Executive Board implemented a series of measures to strengthen the additionality testing that provides guidance for program applications. Biais déclaratif et surveillance dans les projets du mécanisme pour un développement propre Le mécanisme pour un développement propre (MDP) est un programme souple du marché du carbone, administré par les Nations Unies. Il prévoit l'octroi de crédits carbone échangeables (réductions d’émissions certifiées) aux projets favorisant la réduction des émissions de carbone dans les pays en développement. Un projet n'est admissible au programme que s'il n'est pas financièrement rentable et ne verrait donc pas le jour sans les crédits carbone octroyés par l'intermédiaire du MDP. Les auteurs s'intéressent à la façon dont la surveillance réduit la propension des entreprises à faire preuve de subjectivité dans leurs déclarations relatives à la viabilité financière prévue des projets du MDP qu'elles envisagent, afin d’être admises au programme. Ils constatent que les taux de rendement déclarés, qui sont un facteur clé de l'admissibilité au programme, ont tendance à être sous‐estimés et affichent un lien négatif avec les avantages anticipés des réductions prévues de gaz à effet de serre. Toutefois, la surveillance exercée par diverses instances atténue en partie les incitatifs à la subjectivité et les biais déclaratifs qui y sont associés. En outre, l'efficacité de la surveillance devient beaucoup plus marquée après que le Conseil exécutif du MDP ait mis en œuvre, en 2008, une série de mesures visant à renforcer le contrôle de l’« additionnalité » des projets, critère servant de guide dans l’évaluation des candidatures au programme.

Suggested Citation

  • Hui Chen & Peter Letmathe & Naomi Soderstrom, 2021. "Reporting Bias and Monitoring in Clean Development Mechanism Projects," Contemporary Accounting Research, John Wiley & Sons, vol. 38(1), pages 7-31, March.
    • Handle: RePEc:wly:coacre:v:38:y:2021:i:1:p:7-31
    DOI: 10.1111/1911-3846.12609
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    1. Wan, Panbing & Zhang, ZhongXiang & Chen, Lin, 2024. "Environmental co-benefits of climate mitigation: Evidence from clean development mechanism projects in China," China Economic Review, Elsevier, vol. 85(C).
    2. Antônio Carlos Pacagnella Júnior & Henrique Luiz da Silva & Wagner Wilson Bortoletto & Paulo Sergio de Arruda Ignacio, 2023. "Financial and environmental efficiency of CDM projects: Analysis and classification for investment decisions," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(2), pages 926-941, March.

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