Potential contribution of a carbon offset scheme to the costs of greenhouse gas emissions reductions in developing countries



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The energy sector in the developing world is expected to account for 27% of global emissions of greenhouse gases from fossil fuel combustion in 2035 – in 1990 it accounted for 7%. The increase is concentrated in rapidly growing countries in Asia that depend on coal for power generation. Maximizing electricity generation using renewable technologies in these countries provides an obvious approach to slowing global emissions growth.
A barrier to increased use of renewable generation is cost: financial incentives could help to increase its use in developing countries. The principal objective of this research is to examine the practicability and potential scale of an offset scheme aimed at providing this incentive. Offset schemes have a poor reputation due to problems experienced with the Clean Development Mechanism (CDM). I identify the CDM’s failure to ensure the additionality of projects as a key issue and propose an approach to the assessment of additionality specific to grid connected generation projects. I present case studies of wind and small hydro projects in China and India in which I calculate the marginal abatement cost of emissions cuts and use the new approach to additionality to draw conclusions regarding the eligibility of projects to receive offsets in some hypothetical future scheme. My analysis shows that the proposed approach offers advantages over methodologies permitted by the CDM. I analyze the supply and demand for credits from existing schemes during 2013-2020 and show that oversupply will continue to impact their price, removing any incentive for investment in renewable generation. Using an original approach based on IEA forecasts for the energy sector, I estimate the maximum availability of offsets from a post-2020 scheme based on renewable generation, and assess the potential global demand.