Defining investment additionality for CDM projects: Practical approaches

Thomas Langrock, Axel Michaelowa and Sandra Greiner

No 106, HWWA Discussion Papers from Hamburg Institute of International Economics (HWWA)

Abstract: The environmental integrity of the CDM under the Kyoto Protocol depends on the possibility to avoid giving emission credits to projects that would have happened anyway. Whether and how ?Investment Additionality? of CDM projects has to be determined is currently part of climate negotiations. We discuss the rationale of companies to invest in projects and analyse possible criteria to determine Investment Additionality from a theoretical point of view. A number of case studies is used to show the implications of the different criteria. The use of a single criterion is not possible, especially due to the importance of non-monetary barriers. However, some criteria are better than others. Moreover, the institutional framework for the selection and application of criteria is very important. Concluding, we suggest a combination of a threshold Internal Rate of Return with a risk factor as primary criterion. To take nonmonetary barriers into account, additional criteria could be used such as the existence of similar privately financed projects in the host country. If no explicit criterion is politically feasible, stringent baseline methodologies could at least capture some aspects of Investment Additionality.

Date: 2000
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