Essays in environmental finance

The Clean Development Mechanism (CDM) is a mechanism defined in the Kyoto protocol that incentivizes parties to the protocol to fund sustainable development projects in countries that are not party to the protocol. In the first chapter of the paper, I introduce the CDM and how the financing mechanism works. In the second chapter, I analyze a target contract financing structure for different CDM projects in order to see under what conditions the financing structure is efficient and to explore the contract's allocation of profit among the firms. In the two broad categories of CDM projects I consider, I find the optimal investment decision for the investor and for the overall system. I also analyze how the residual value of technology would affect the financing, target contract's efficiency, and allocation of profit. In the third chapter, I conduct empirical analysis on the actual CDM outputs, Certified Emission Reduction units (CERs), for a sample of wind CDM projects in China. I find that CDM projects greatly underperform relative to the promises they make. Based on this underperforming records, in the fourth chapter, I analyze the economic benefits investors could gain if they were able to directly fund a portfolio of CDM projects and obtain returns from the anticipated CER issuances and underlying energy generated from the portfolio of CDM projects. I consider a variety of funding constraints that the CDM fund/portfolio manager (CDM-PM) may face and determine their economic performance against actual CDM project data for wind CDM projects in China.