Germany and other industrialized countries may lower the macro-economic costs caused by climate protection by investing in projects that lower emissions in developing countries. Calculations by the Centre for European Economic Research (ZEW) in Mannheim show that the climate proctection goals of the Kyoto protocol can be reached in a much more cost efficient manner by applying the so-called “Clean Development Mechanism” instead of taking measures at home. Even the transaction costs and investment risk involved in such investment abroad will not compromise the advantages thereof.
According to the ZEW, the industrialized countries do not necessarily have to reach their climate protection goals within their own national borders. In order to achieve the agreed reductions in green house gas emissions the Kyoto protocol permits investment in “clean” technologies (such as renewable sources of energy) in developing countries. The emission reductions then achieved will be credited to the investing industrialized country in question. This process is called Clean Development Mechanism (CDM). In particular China, India and Bresil have already attracted many of these environment friendly investment projects.
These CDM investments are often more cost efficient than taking climate protection measures at home given that in industrialized countries the technological state of the art and climate protection measures already in place are much more advanced than in developing countries so that by investing in climate protection in developing countries much more could be achieved. A new study by the ZEW shows that CDM investment can drastically lower the costs of the implementation of the Kyoto protocoll from 2010 onwards.
An intensive use of CDM, however, could be impaired by investment barriers. Thus, in carrying out CDM there are so-called transaction costs involved which are due to e.g. legal advice sought or protracted project documentation. The percentage of such transaction costs is particularly high for smaller projects. At the same time projects in less developed countries are often linked to investment risks caused by political instability or exchange rate oscillations. The ZEW study shows, however, that even though transaction costs and investment risk drive up the price of emission certificates, the macro-economic costs of the implementation of the Kyoto protocol will not significantly be affected.
The study in English language was published as the ZEW Discussion Paper No. 07-026 and is available for free-of-charge download from the internet. 