This article focuses on a specific type of offset program, the Clean Development Mechanism (CDM) of the Kyoto Protocol . It provides an overview of the Kyoto “flexible mechanisms”, explains how CDM offset credits are generated, and also examines the growth of the international carbon market. Carbon finance has shown that a market-based mechanism can draw significant amounts of capital, both public and private, to the problem of climate change. This can spur economic activity and transfer climate-friendly technology to developing countries. The international carbon market has learned significant lessons and has developed a regulatory infrastructure to offset credits through the CDM. The authors assert that the lessons learnt can provide a roadmap not only for improving the CDM, but also for expanding the carbon market to include new market participants and regulatory regimes. Lessons learnt include:
both the EU Emission Trading System and CDM were successful in bringing substantial amounts of capital into the carbon market in a short amount of time
the CDM was instrumental in developing a regulatory infrastructure capable of generating significant amounts of offset credits. This CDM regulatory infrastructure can serve as a model for other national and international programs. Few regulatory programs satisfy every goal of every stakeholder, and the CDM is no exception. One significant challenge for the CDM will be to evolve to scale
the international carbon market is just that - a market. Early CDM projects involved credits that could be generated both quickly and relatively inexpensively. This is not surprising since markets seek the most efficient mechanism for creating economic value.