Rent extraction with a type-by-type scheme: An instrument to incorporate sustainable development into the CDM

Although the CDM is supposed to assist developing countries in achieving sustainable development, sustainable development is not incorporated into the market aspect of the CDM. By participating in the CDM, developing countries may end up losing all cheap emissions reduction possibilities, while obtaining little sustainability benefits. This paper proposes rent extraction with a type-by-type scheme as an instrument to incorporate sustainable development into the CDM. The rent extraction with a type-by-type scheme makes it possible for the CDM host country government to discourage the low-cost projects that have little sustainability benefits, and to extract more rent from the projects that are developed. The main challenge of implementing this instrument is the uncertainty of the opportunity cost, but the host country government can adjust the scheme for the uncertainty to achieve its goal. Therefore, the type-by-type scheme will better assist the host country in achieving sustainable development than a single-rate scheme.