Economics of clean development mechanism power projects under alternative approaches for setting baseline emissions

Setting the baseline emission and estimating emission reductions associated with a climate friendly project are among the key issues involved in identification of a clean development mechanism (CDM) project under the Kyoto Protocol. This paper presents a methodology for identification of a CDM project and assessment of its environmental and economic implications under alternative approaches for establishing baseline emission, that is, traditional supply based planning and integrated resource planning (IRP). The paper also examines the role of “rebound effect” in the assessment of emission reductions from the CDM project under the IRP approach. A case study of India based on the methodology is presented in the paper. The study shows that the level of emission mitigation from the power system with a particular CDM project and the associated emission abatement cost could vary significantly with the type of approach used for determining the baseline emission. It also shows that the optimal timing for implementation of the CDM project could vary with the type of the baseline approach used. Furthermore, our analysis shows that under each of the baseline approaches, the net benefit from a candidate CDM project need not increase with its size (i.e., generating capacity).