Reporting Bias and Monitoring in Clean Development Mechanism Projects

Posted: 9 Jun 2020

See all articles by Hui Chen

Hui Chen

University of Zurich

Peter Letmathe

RWTH Aachen University; University of Siegen - Faculty of Economics and Management Science

Naomi S. Soderstrom

University of Melbourne

Date Written: April 7, 2020

Abstract

The Clean Development Mechanism (CDM) is a flexible carbon market mechanism managed by the United Nations. The program grants tradable carbon emissions credits (Certified Emission Reductions) for carbon-reducing projects in developing countries. A project can only be admitted to program if it is not financially profitable, and thus would not take place, without the emission credits granted through the CDM. In this paper, we examine how monitoring reduces incentives of companies to bias the reported expected financial viability of potential CDM projects to gain admission to the program. We find that reported rates of return, which are a key factor for admission to the program, tend to be downwardly biased and are negatively associated with the expected benefits stemming from forecasted greenhouse gas reductions. However, monitoring from various sources mitigates some of the distorted incentives and related reporting bias. Furthermore, the monitoring effect becomes much stronger after 2008, when the CDM Executive Board implemented a series of measures to strengthen the additionality testing which provides guidance for program applications.

Keywords: Reporting Bias, Clean Development Mechanism (CDM), Auditing

Suggested Citation

Chen, Hui and Letmathe, Peter and Soderstrom, Naomi S., Reporting Bias and Monitoring in Clean Development Mechanism Projects (April 7, 2020). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3611644

Hui Chen

University of Zurich ( email )

Plattenstrasse 14
Zurich, CH-8032
Switzerland

Peter Letmathe (Contact Author)

RWTH Aachen University ( email )

Templergraben 64
Aachen, 52062
Germany

University of Siegen - Faculty of Economics and Management Science ( email )

Hoelderlinstr. 3
Siegen, 57072
Germany

Naomi S. Soderstrom

University of Melbourne ( email )

Victoria
Melbourne, 3010
Australia

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