CDM baseline approaches and carbon leakage

Carbon leakage is an important issue because it can reduce the environmental effectiveness of international climate agreements. Under the Kyoto Protocol, the clean development mechanism (CDM) can potentially reduce carbon leakage significantly. To what extent this potential can be realized depends on how the CDM baseline approach accounts for this effect. We use a computable general equilibrium model to analyze the impact of three different baseline approaches, and find that they produce diverging results as the number of CDM projects increase. We do, however, find that under realistic assumptions on the level of CDM activity the CDM will significantly reduce carbon leakage irrespective of which baseline approach is used.