Implied Valuation of Environmental Externalities



The Clean Development Mechanism (CDM), one of the flexibility mechanisms launched under the Kyoto Protocol, is intended to internalize environmental externalities and to help developing countries achieve their developmental objectives employing cleaner, albeit possibly more expensive, technologies. Project proponents are required to establish the “additionality” of a project, that is, demonstrate that the project overcomes significant technological, financial, and social barriers in its wake, and, therefore, additional cash flows from trading the “carbon credits” would be required to sustain operations. The registration process is clearly defined, and rather elaborate, involving, among other things, approval by the designated national authority (“host country approval”) and culminating in the approval and issue of emission reduction certificates (CER) by the CDM-Executive Board (EB).

This chapter estimates the environmental externality embedded in the market valuation of a portfolio of publicly traded Indian firms whose project proposals had been approved by the national authority in India but had eventually been rejected by the CDM-EB. It is observed that approval by the host country generally triggers a positive response from the market; investors factor in competitive returns on capital employed, owing to the CDM-related accruals. However, responses on rejection tend to be uncharacteristic and inconsistent. A few suggestions are presented to try and explain such anomalous behavior.


Emission Reduction Abnormal Return Clean Development Mechanism Kyoto Protocol Clean Development Mechanism Project 
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Copyright information

© Springer India 2013

Authors and Affiliations

  1. 1.Verdurous Solutions Private LimitedMysoreIndia

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