Abstract The Clean Development Mechanism (CDM) of the Kyoto Protocol provides Annex-I (industrialized) countries with an incentive to invest in emission reduction projects in non-Annex-I (developing) countries to achieve a reduction in CO2 emissions at lowest cost that also promotes sustainable development in the host country. Biomass gasification projects could be of interest under the CDM because they directly displace greenhouse gas emissions while contributing to sustainable rural development. However, there is only one biomass gasifier project registered under the CDM so far. In this study, an attempt has been made to assess the economic potential of biomass gasifier-based projects under CDM in India. The preliminary estimates based on this study indicate that there is a vast theoretical potential of CO2 mitigation by the use of biomass gasification projects in India. The results indicate that in India around 74 million tonne agricultural residues as a biomass feedstock can be used for energy applications on an annual basis. In terms of the plant capacity the potential of biomass gasification projects could reach 31 GW that can generate more than 67 TWh electricity annually. The annual CER potential of biomass gasification projects in India could theoretically reach 58 million tonnes. Under more realistic assumptions about diffusion of biomass gasification projects based on past experiences with the government-run programmes, annual CER volumes by 2012 could reach 0.4–1.0 million and 1.0–3.0 million by 2020. The projections based on the past diffusion trend indicate that in India, even with highly favorable assumptions, the dissemination of biomass gasification projects is not likely to reach its maximum estimated potential in another 50 years. CDM could help to achieve the maximum utilization potential more rapidly as compared to the current diffusion trend if supportive policies are introduced.