The Carbon Market and Economic Factors That Can Affect Emissions Reduction Success
Abstract: Greater awareness about the consequences of increasing greenhouse gases (GHG) has triggered some policies in order to reduce emissions, including the creation of carbon markets. There are different types of mechanisms, such as the European Emission Trade Scheme (EU ETS), which follows the cap-and-trade principle, and carbon credits based on projects deployed with a focus on emissions reductions (such as the Clean Development Mechanism, CDM, a Kyoto Protocol instrument). Based on the New Institutional Economics, the main objective of this paper is to discuss whether the performance measure Emissions Reduction Success (RS) in the EU ETS and in CDM projects are influenced by institutional characteristics of the hosting countries (such as transaction costs, property rights, and corruption) and by microeconomic features of projects (such as sector, scale, and GHG emission reduction volume). For this purpose, Emissions Reduction Success (RS) is defined as the ratio between estimated and actual emissions reduction. By using econometric models, we conclude that institutional and microeconomic variables influence Emission Reduction Success in both EU ETS and CDM projects. The most important variable affecting project performance is the project sector.
