Realizing the Development Dividend: Making the CDM Work for Developing Countries Aaron Cosbey, Climate Change & Energy, IISD

Objectives of the CDM To assist Parties not included in Annex I in achieving sustainable development and in contributing to the ultimate objective of the Convention. To assist Parties included in Annex I in achieving compliance with their quantified emission limitation and reduction commitments. Note the two-fold character of the CDM. The question is, how well is it achieving the first part? (But we cannot, of course, ignore the second part – no investment, no development dividend) Of course, host countries are the ultimate arbiters of what is and is not sustainable development. Our approach: they are all sustainable development. But are they as good as they could be?

What is the Development Dividend? All the non-climate-related SD benefits (co-benefits) that might result from a CDM project, whether from investment, tech transfer, new production processes, or new products: Environmental benefits (e.g., better air quality) Economic benefits (e.g., increased employment) Social benefits (e.g., better quality of life via energy) To be sustainable development, need some element of all three types of benefits. The Development Dividend Project aims to help the CDM better deliver these benefits, in large quantities. Surveyed the literature: broad agreement: SD is economic, social, environmental. Projects scoring high are renewables, energy efficiency.

The Development Dividend Project Phase I: analytical report Survey of 50 stakeholders, lit review NGOs, donors, private sector, governments Developing and developed countries Supported by: Norway, Denmark, Canada, IDRC, UNDP.

The Analysis: Three Questions Is the CDM shaping up to deliver sustainable development benefits? Is the CDM shaping up to deliver enough quality projects/investment? Is the CDM delivering investment equitably, reaching least developed countries? Linkages: First question: development dividend at the project level. Quality of the projects. Second Question: development dividend at the overall level: if there’s project quality, are there enough projects? Third question: if we have quality and quantity, do we have equity?

1. The Quality Question 6 HFC projects, 2 N2O projects. Out of total of 411. HFC & N2O: 52% CH4 and cement: 24% Renewables: 19% Energy efficiency: 4% Fuel switching: 1% Renewables: biomass energy, hydro , wind, biogas, geothermal, solar, tidal Energy efficiency: EE industry, EE households, EE service, transport, energy dist CH4 reduc & cement: cement, agriculture, LFG, fugutuve Note: This is the expected success of the market mechanism – we’re not against these projects.

2. The Quantity Question Number of Projects Annual GHG Credits Source: Ellis & Levina Annual GHG Credits Source: Ellis & Levina

2. The Quantity Question 411 projects registered and in progress; 122 MtCO2e /yr. Estimated demand: 217 – 640 MtCO2e/yr in 2010. To meet that demand, with current average project size, need 849 – 2,504 projects in 1st commitment period. Can’t assume volume will continue, or that all CERs will materialize. As of Nov. 16 2005 – source: UNEP-Risoe Why is quantity important? Even after we fix quality concerns, still need more CDM than we’re likely to get: for development reasons, and for Annex I purchaser reasons. Compare to ODA (47 billion 2004; FDI to developing countries: 172 billion 2003) Many more projects to come – CDM is still maturing. Though – considering a 3 – 4 yr. Start-up time, and an uncertain 2012, gotta be on the books now to even get 5 yrs of credits. Also consider that lots of them won’t get projected credits – no financing, or underperforming. technical note from Aaron: to get the figure of 91 MtCO2e/year, I am taking the total Mt/yr. and dividing by five.  This doesn't give us the actual Mt/yr., since most projects have crediting periods good for more than just the 5-year commitment period.  But it does give us a figure we can use to compare demand (which is just over a five year period) to supply.  That is, the total supply will be matched to the demand over the five years, even if it is generated over more than five years.)

Geographic Split of Expected CERs 3. The Equity Question COP 7 stressed “the need to promote equitable geographic distribution of clean development mechanism project activities at regional and subregional levels.” (Decision 17 CP.7) India, China, Brazil together make up 56% of expected CERs, 63% of projects. Of the 49 LDCs, only 5 have projects (1 each in Uganda, Bhutan and Cambodia, and 2 each in Bangladesh and Nepal). Only South Africa (6), Morocco (3), Nigeria (1) and Uganda (1) have projects in Africa. 1 projects in an LDC (Uganda) in Africa. But, is this a realistic goal? Geographic Split of Expected CERs Source: Ellis & Levina

Policy Options (from Phase I) EB/Project Cycle Changing Rules Engaging ODA, FIs CDM Post-2012 Defining SD in CDM 1. Better communication between the EB, MP and project proponents, private sector. High transactions costs from slow approval, risk, uncertainty, equal costs. Smaller projects have proportionately higher impacts. Also, low volume of CERs may be in part due to procedural roadblocks. 2. - Allow policy-based CDM - Allow sectoral CDM - Affirm support for unilateral CDM. - Explore expanding CDM sinks projects to include agriculture, avoided deforestation. Go from a bottom up project-based approval to some top-down methods. From retail to wholesale approach. Allows for greater volumes of course. But also allows for projects with greater SD benefits (cf. Chile). And in countries with not much CDM to date.

The Development Dividend Project - Phase II Task Force of 30 Experts from various stakeholder groups - to consider theme, draft papers, help influence policy process, advance debate. Development of three analytical papers – to delve further into three issues identified in Phase I. Supported by Norway, Denmark, Canada, UNDP, IDRC. COP-2 to consider rule changes for CDM

Phase II Research Papers 3 papers completed and released prior to COP/MOP-2, where rule changes for CDM will be considered: 1. Defining the development dividend 2. Changing the rules of the CDM 3. Financing the development dividend

1. Defining the Development Dividend Will more clearly articulate what is meant by “Development Dividend”, but not as a condition. Propose a framework for assessing its strength in specific CDM projects. This could include an examination of small-scale projects and approaches for increasing the development dividend; and an examination of expected markets for projects with a development dividend,

2. Changing the Rules for a Development Dividend Will explore in depth some of the CDM rule changes suggested in the Phase I report, e.g.: sectoral and policy-based CDM special treatment for small-scale projects product-based crediting expanded role for sinks. Case studies and analysis will highlight the potential and practical difficulties with each approach.

3. Financing the Development Dividend Will explore the ways in which we might increase the available financing for CDM projects that yield Development Dividend. Will assess the state of the problem, survey existing approaches and evaluate recommendations. Role of ECAs, IFIs, Trust Funds, etc.

The Development Dividend More information available at: www.iisd.org/climate/global/dividend.asp Contact: Aaron Cosbey acosbey@iisd.ca