Financing the Clean Development Mechanism through Debt-for-Efficiency Swaps? Case Study Evidence from a Uruguayan Wind Farm Project

Abstract

As one of Kyoto's three flexibility mechanisms, the Clean Development Mechanism (CDM) allows the issuance of Certified Emission Reduction credits from offset projects in non-Annex I countries. As little attention has been paid to how CDM projects are financed, this article assesses whether offset schemes with public bodies should utilise debt swaps as a form of funding. Specifically, we examine whether a debt-for-efficiency swap between Uruguay and Spain within a wind power project increased project finance and generated greater development co-benefits. We assess the transaction using a simple evaluative framework: whether it delivered additional resources to the debtor country and/or government budget; whether it delivered more resources for climate change mitigation; whether it had a sizeable effect on overall debt burdens (creating 'indirect' benefits); and whether it aligned with government policy and systems (elements of the new aid approach). We find evidence that cautions against using the Spanish-Uruguayan case as a model for future debt-for-efficiency swaps.Parmi les trois mécanismes de flexibilité du Protocole de Kyoto, le Mécanisme de Développement Propre (MDP) permet la diffusion des crédits de carbone provenant des projets compensatoires dans des pays nonAnnexe I. Manque de réflexion sur les modes de financement des projets MDP, cet article vise à évaluer l'utilisation, par des bailleurs de fonds officiels comme intervention d'aide publique au développement, des opérations de conversion de la dette officielle comme mode de financement utile. Plus particulièrement, nous examinons dans quel mesure une opération de conversion de dette au bénéfice des économies d'énergie entre l'Uruguay et l'Espagne dans le secteur d'énergie éolienne, inclue dans un projet MDP, a bénéficié au financement du projet et à la disponibilité des ressources additionnelles pour le pays débiteur et pour la mitigation climatique, a créé des avantages complémentaires sur le plan du développement, et s'inscrit dans la nouvelle approche « d'alignement » de l'aide au développement aux politiques et systèmes du pays récepteur. Nos résultats mettent en garde contre l'adoption du cas espagnol-uruguayen comme modèle exemplaire pour des opérations futures de conversion de dette au bénéfice des énergies propres dans le cadre MDP.

Alleviating debt distress and advancing the sustainable development goals

“…As discussed by Cassimon, Prowse, and Essers (2014), such swaps could lead to a double dividend: a reduction of developing country hard currency needs for debt servicing (sometimes financed by environmentally degrading natural resource extraction) and additional funds for conservation purposes (Jha & Schatan, 2001).…”

Pollution in a globalized world: Are debt transfers among countries a solution?

“…Finally, in our paper, debt relief is undertaken without any counterpart. Hence, our model does not take into account debt for nature swaps (Deacon and Murphy, 1997;Cassimon et al, 2011Cassimon et al, , 2014. The literature on economic development underlines the inefficiencies of this type of aid as soon as donor country monitoring is not put in place.…”

The clean development mechanism in Eastern Europe: an in-depth exploration

“…First of all, most CDM projects are effective in the short term, but ineffective in the long term, which casts doubt on this mechanism as a whole (Hepburn 2007 ; Cassimon et al 2014 ). Within the sustainable development pathway, project indicator scores are very low, and the investment flow to these projects is targeted at a very narrow list of countries, which leads to geographic concentration of projects.…”