The Impact of Ex-Ante versus Ex-Post CDM Baselines on a Monopoly Firm

Clean Development Mechanism (CDM) baseline setting methods may be broadly classified as ex ante or ex post. Ex post baselines consider information available before and after implementation of the project. However, the incorporation of ex post information inadvertently runs the risk of distorting the incentives of project participants. Accordingly, when the scale of output is endogenously determined, an ex post baseline tends to boost output. We show that this may increase total emissions, despite the reduction in emissions per output. With an ex ante baseline, output is suppressed, bringing about the benefit of a reduction in total emissions. However, lower output implies a decrease in consumer and producer surplus. Consequently, total social welfare may actually deteriorate because of the CDM.