Climate Change & Energy, IISD Realizing the Development Dividend: Making the CDM Work for Developing Countries John Drexhage, Climate Change & Energy, IISD BCSE Side Event 1st December 2005

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 co-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. Supported by: Norway, Denmark, Canada, IDRC, UNDP. The Development Dividend is an on-going project exploring how to provide host countries with socio-economic and environmental gains – a development divided – while simultaneously meeting investors’ need for low-cost emission reduction opportunities. Surveyed the literature: broad agreement: SD is economic, social, environmental. Projects scoring high are renewables, energy efficiency.

Development Dividend Project – Phase I 1. Quality –over half of CDM projects in renewables, but only 20% of CERs/yr. 6 HFC and 2 N20 projects account for 2% of projects and 53% of CERs/yr. 2. Quantity - 455 projects registered and in progress; 118 MtCO2e /yr. To meet estimated demand of 217 – 640 MtCO2e/yr in 2010,with current average project size, need 840 – 2,475 projects in 1st commitment period. 3. Equity - 6 countries (India, Brazil, Mexico, Philippines, Chile, China) make up 75% of all CDM project activity. Of 49 LDCs, only 5 have CDM projects. Only 4 African countries have CDM projects. Phase I analytical paper examined if the CDM was meeting its dual objectives: 1) Sustainable Development for host countries 2) assist Annex ! Parties in achieving compliance with emission reduction commitments. The research (through lit review and survey of 50 stakeholders) examined three questions: Does the CDM deliver SD benefits (quality)? Does the CDM deliver enough projects (quantity)? Does the CDM deliver investment equitably (distribution)? based on data from UNEP-Risoe CDM Pipeline (14th November 2005)

Policy Options EB/Project Cycle – EB as professional body; more resources for EB, Meth Panel; focus on environmental additionality; assume additionality for small-scale projects. Changing Rules – policy-based CDM, sectoral CDM, explore expansion of sinks projects. 3. Engaging ODA, FIs – increase support for existing efforts such as CDCF, explore role for ODA in high SD cases, expand awareness of CDM, ECAs to develop support for CDM. 1. Institutional Reforms - 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. Better communication between the EB, MP and project proponents, private sector. 2. - Allow policy-based CDM; 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. 3. Increase support for/investment in existing efforts such as CDCF, Bio Carbon Fund. - Explore role for ODA, esp. in high SD cases. - Expand awareness of CDM in FIs, IFIs.

Policy Options CDM Post-2012 - Give some assurance that carbon will have value after 2012. Specifics are obviously impossible, but a modicum of predictability is not. Defining SD - IFIs, donors, NGOs, others should continue helping host countries define SD; Draft principles and guidelines for SD at international level, to be elaborated more specifically at national level. Situating the Policy Options: Majority of policy options can be done now, outside of negotiations. Others can be done within the first commitment period. Others can be done only post-2012. 4. Addresses 2nd concern: the quantity question. Window of opportunity is closing. 5. SD – some fear a race to the bottom in defining SD standards; need to clarity SD Negotiated amendments will have to wait for MOP-2. But most can be done now: All non-governmental actions, or unilateral government actions (ODA, ECAs, IFIs, government purchases of CERs, work with DNAs) Procedural changes, funding changes within the mandate of the EB or donor governments (but not changing the Marrakech Accords) Even possibly some rules changes: policy based controversy. Exceptions: some rules changes (sectoral, sinks, possibly policy-based). Also signal for post-2012.

Phase II – Furthering the Policy Recommendations Development Dividend Task Force International group with 30 members 3 research papers: Defining the Development Dividend Changing the Rules for a Development Dividend Financing the Development Dividend Phase II of the Development Dividend Project will delve into the recommendations arising from Phase I. 30 member Task Force to oversee the development of research papers and to identify way the CDM can evolve in a more “Development friendly” manner. 3 research papers 1. Articulating what is meant by Developmetn Dividend and proposing a framework for assessing its strength in CDM projects – how to get large quantities of CERs with a development dividend into the mainstream market. 2. Exploring options for changing rules to increase Development Dividend – sectoral CDM. Policy-base CDM, Additionality, Sinks, small-scale 3. Exploring ways that might increase available financing for CDM projects that yield a development dividend.

The Development Dividend More information available at: www.iisd.org/climate/global/dividend.asp Contact: John Drexhage jdrexhage@iisd.ca +1-613-238-9820