Implied Valuation of Environmental Externalities

  • Srinivasan Sunderasan


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 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


  1. Arsenio E, Bristow AL, Wardman M (2006) Stated choice valuations of traffic related noise. Transp Res D Transp Environ 11(1):15–31CrossRefGoogle Scholar
  2. Bernal-Agustin Jose L, Dufo-Lopez R (2006) Economical and environmental analysis of grid connected photovoltaic systems in Spain. Renew Energy 31(8):1107–1128CrossRefGoogle Scholar
  3. Boiral O (2006) Global warming: should companies adopt a proactive strategy? Long Range Plann 39(3):315–330CrossRefGoogle Scholar
  4. Bromiley P, Govekar M, Marcus A (1988) On using event-study methodology in strategic management research. Technovation 8(1–3):25–42CrossRefGoogle Scholar
  5. Chan-Lau Jorge A (2002) Corporate restructuring in Japan: event-study analysis. Jpn World Econ 14(4):367–377CrossRefGoogle Scholar
  6. Chen M-H, Jang SooCheong (Shawn) S, Kim Woo G (2007) The impact of the SARS outbreak on Taiwanese hotel stock performance: an event-study approach. Int J Hosp Manage 26(1):200–212CrossRefGoogle Scholar
  7. Diaz-Balteiro L, Romero C (2008) Valuation of environmental goods: a shadow value perspective. Ecol Econ 64:517–520CrossRefGoogle Scholar
  8. Duso T, Gugler K, Yurtoglu B (2006) Is the event study methodology useful for merger analysis? A comparison of stock market and accounting data. Discussion paper 163, CIG working papers, Wissenschaftszentrum Berlin (WZB).
  9. Ellis J, Winklen H, Corfee-Morlot J, Gagnon-Lebrun F (2007) CDM: taking stock and looking forward. Energy Policy 35:15–28CrossRefGoogle Scholar
  10. Kumar M, Kumar P (2008) Valuation of ecosystem services: a psycho-cultural perspective. Ecol Econ 64(4):808–819CrossRefGoogle Scholar
  11. Longo A, Markandya A, Petrucci M (2008) The internalization of externalities in the production of electricity: willingness to pay for the attributes of a policy for renewable energy. Ecol Econ 67(1):140–152CrossRefGoogle Scholar
  12. Mehra R (2006) The equity premium in India. NBER working paper no. 12434. National Bureau of Economic Research, Cambridge.
  13. Mei B, Sun C (2008) Event analysis of the impact of mergers and acquisitions on the financial performance of the U.S. forest products industry. Forest Policy Econ 10(5):286–294CrossRefGoogle Scholar
  14. Moran Daniel D, Wackernagel M, Kitzes Justin A, Goldfinger Steven H, Boutaud A (2008) Measuring sustainable development – nation by nation. Ecol Econ 64:470–474CrossRefGoogle Scholar
  15. Munda G (1996) Cost-benefit analysis in integrated environmental assessment: some methodological issues. Ecol Econ 19(2):157–168CrossRefGoogle Scholar
  16. Neupane A, Gustavson K (2008) Urban property values and contaminated sites: a hedonic analysis of Sydney, Nova Scotia. J Environ Manage 88(4):1212–1220CrossRefGoogle Scholar
  17. Nijkamp P, van den Bergh JCJM (1997) New advances in economic modeling and evaluation of environmental issues. Eur J Oper Res 99(1):180–196CrossRefGoogle Scholar
  18. Owen AD (2006) Renewable energy: externality costs as market barriers. Energy Policy 34(5):632–642CrossRefGoogle Scholar
  19. Rafaj P, Kypreos S (2007) Internalization of external cost in the power generation sector: analysis with global multi-regional MARKAL model. Energy Policy 35(2):828–843CrossRefGoogle Scholar
  20. Randall A (2007) A consistent valuation and pricing framework for non-commodity outputs: progress and prospects. Agric Ecosys Environ 120(1):21–30CrossRefGoogle Scholar
  21. Schneider M, Holzer A, Hoffmann VH (2008) Understanding the CDM’s contribution to technology transfer. Energy Policy 36(8):2930–2938CrossRefGoogle Scholar
  22. Stirling A (1997) Limits to the value of external costs. Energy Policy 25(5):517–540CrossRefGoogle Scholar
  23. Sugiyama T, Michaelowa A (2001) Reconciling the design of CDM with inborn paradox of additionality concept. Clim Policy 1(1):75–83Google Scholar
  24. The Economist (2007) The clean development mechanism: how to make a clever deal cleverer. The Economist, 29 Nov EdGoogle Scholar
  25. Tolmasquim Mauricio T, da Motta Ronaldo S, La Rovere Emilio L, de Lima Barata Martha M, Monteiro Aline G (2001) Environmental valuation for long-term strategic planning – the case of the Brazilian power sector. Ecol Econ 37(1):39–51CrossRefGoogle Scholar
  26. Tsai D, Chang S, WeiWei C, Tran C-l (2008) The market valuation of new route announcements. J Air Transp Manage 14(5):252–256CrossRefGoogle Scholar
  27. WCSD (1987) Our common future. The World Commission on Environment and Development (WCSD), Chaired by Harlem Brundtland, Oxford University Press, OxfordGoogle Scholar
  28. Welch D (2007) A buyer’s guide to offsets. Ethical Consumer, 106, May/June 2007Google Scholar

Copyright information

© Springer India 2013

Authors and Affiliations

  1. 1.Verdurous Solutions Private LimitedMysoreIndia

Personalised recommendations