The Kyoto Protocol's Clean Development Mechanism (CDM) is a carbon credit trading scheme intended to reduce anthropogenic greenhouse gas emissions and promote ‘sustainable development’. Hundreds of CDM‐sponsored hydroelectric dams have been constructed in southwest China's Yunnan Province, where carbon finance contributes substantial financial incentives to hydropower expansion. This article investigates whether riparian Handai farmers settled near the Madushan hydropower plant on the Chinese section of Red River have experienced positive outcomes from this project's participation in the CDM. I assess how Handai individuals' access to core livelihood assets has been modified following dam completion and probe how the CDM reconfigures scalar relations among the various stakeholders involved in hydropower governance in Yunnan. Though the CDM facilitates hydropower expansion, it fails to produce development that is more sustainable than ‘business as usual’ from a local perspective. Rather, the CDM consolidates hydropower governance in the same way as it unfolded in Yunnan before the province became an active participant in this scheme. The CDM also facilitates a national development campaign fostering specific socio‐economic modernization patterns in China's western provinces.