Financing the Clean Development Mechanism through debt-for-efficiency swaps? Case study evidence from a Uruguayan wind farm project
Institute of Development Policy and Management
Antwerp :UA, Institute of Development Policy and Management, 2011
IOB working paper ; 2011:06
University of Antwerp
As one of Kyoto's three flexibility mechanisms for reducing the cost of compliance, the Clean Development Mechanism (CDM) allows the issuance of Certified Emission Reduction (CER) credits from offset projects in non-Annex I countries. Whilst much attention has focused on the widespread use of the mechanism by China and India, the complex project cycle, and the lack of convincing baselines, little attention has been paid to the financing of CDM projects. In this paper we assess the extent to which CDM projects with public bodies should utilise debt swaps as a form of finance. The paper does this through analysing the use of a debt swap between Uruguay and Spain within a CDM wind farm project in Uruguay. The paper assesses this transaction according to a simple framework by which debt swaps can be evaluated: whether it delivers additional resources to the debtor country and/or debtor government budget; whether it delivers more resources for climate purposes; whether it has a sizeable effect on overall debt burdens (thereby creating 'indirect' benefits); and whether it adheres to the principles of alignment with government policy and systems (key elements within the new aid approach).