The carbon-offsetting scheme Clean Development Mechanism (CDM) has evolved into one of the most important instruments for the funding of renewable energy projects in mountain regions in developing and newly industrializing countries. The CDM allows industrialized states to compensate for greenhouse gas emissions by investing in climate change mitigation activities abroad. These offsetting projects are intended to avoid emissions while simultaneously contributing to sustainable development at the local level. The most common project type under the CDM is hydropower, with the majority of projects being located in the mountain areas of China and India. However, doubts about the scrutinizing methods of the CDM as well as the often controversial impacts of dam building on mountain environments and communities raise questions about the ability of these “clean development” dams to serve as a sustainable means of mitigating climate change. The objective of the present article is to assess the effectiveness of large CDM hydropower projects in the Indian state of Himachal Pradesh. Analysis of planning documents and expert interviews revealed that “clean development” dams in the Himachal Himalaya fall short of achieving the goals of the CDM. Most projects are not in a position to compensate for emissions because they would have been built even without CDM support. Furthermore, it is arguable whether CDM dams contribute to sustainable mountain development, because the consequences of their construction are the same as for many other ordinary large dams, that is, environmental damage and conflicts that arise from the reallocation of land and water resources. Our results suggest that the promotion of large hydropower projects through the CDM in its current form is a highly ambivalent strategy. Shortcomings in the regulatory framework of the CDM may be undermining the environmental and social integrity of the CDM at both the global and local levels.