Renewable energy investment in emerging markets: Evaluating improvements to the clean development mechanism

Abstract

In the past, industrialized countries have invested in or financed numerous renewable energy projects in developing countries, primarily through the Clean Development Mechanism (CDM) of the Kyoto Protocol. However, critics have pointed to its bureaucratic structure, problems with additionality and distorted credit prices as ill-equipped to streamline renewable energy investment. In this paper, we simulate the impact of policy on investment decisions on whether or not to invest in wind energy infrastructure in India, Brazil and China. Data from 2,578 past projects as well as literature on investor behaviour is used to inform the model structure and parameters. Our results show that the CDM acts differently in each country and reveal that while streamlining the approval process and reconsidering additionality can lead to non-trivial increase in total investment, stabilizing policy and decreasing investment risk will do the most to spur investment.