Carbon Market, Agglomeration Externalities and Wind Power Investment

37 Pages Posted: 17 Oct 2013

Date Written: January 14, 2012


The international carbon market, specifically the Clean Development Mechanism (CDM) created by the Kyoto Protocol, is an important contributor to the breathtaking growth of renewable energy in China. Ever since its debut, it has been at the center of the policy debate whether the CDM achieves real emission reductions or just generates "hot air." The goal of this paper is to investigate its effect on wind power investment and to simulate the counterfactual scenario without the carbon market. I develop a fully dynamic model that incorporates the strategic interactions of wind farms that are induced by agglomeration externalities. The empirical results suggest that only 22 percent of wind power projects would not have happened with the proceeds from carbon credits, which throws the additionality of the CDM into question. The results also imply that the development of wind power may not be dramatically slowed down by the expiration of the Kyoto Protocol.

Keywords: wind energy, carbon market, strategic interactions, Markov perfect equilibrium

JEL Classification: Q54, C23, C14

Suggested Citation

Zhang, Junjie, Carbon Market, Agglomeration Externalities and Wind Power Investment (January 14, 2012). Available at SSRN: or

Junjie Zhang (Contact Author)

Duke Kunshan University ( email )

No. 8 Duke Avenue
Kunshan, 215316
+86 512 36657068 (Phone)


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