This paper considers how an offset scheme specific to the electricity generation sector could incentivize emissions cuts while avoiding the problems encountered by the Clean Development Mechanism (CDM). It proposes an approach to project evaluation based on measures of additionality, economic viability and contribution to sustainable development specific to this sector and re-evaluates 460 registered CDM projects in China that generate electricity using wind, natural gas or small hydro. It concludes that many small hydro schemes would be viable without the CDM subsidy. Although these projects have zero emissions from operations, offsets issued to projects that are viable without subsidy permit increased emissions in developed countries and lead to a net increase in global emissions. To provide some indication of the sustainable development benefits that CDM projects bring to their host countries, the paper includes estimates of the projects' benefit to public health due to the reduced use of coal for generation. The paper provides insights into the economics of projects and their value to host countries that are missed by the official CDM methodologies. It contributes to the debate over the design of sector-specific offset schemes that may be part of a new global agreement on combating climate change. (C) 2010 Elsevier Ltd. All rights reserved.