Options to Foster the Development Dividend Meeting of the Expert Task Force of the IISD Development Dividend Project October 19-20, 2006 Copenhagen Deborah Murphy, IISD

Outline of Presentation Objective of the Paper Options –Additionality –Programmatic CDM –Small-scale CDM projects –Expanding the roles for LULUCF projects –Increasing CDM investment in LDCs

Options for Fostering the CDM: Objective of Paper Explore options, with an emphasis on increasing the amount of CERs delivering a strong Development Dividend Address the concerns noted in Chapter 1 – that international investment in reducing GHG emissions provide real environmental and commercial benefits, and at the same time, be cost effective

Additionality – Challenges/Barriers Methods to address additionality have been criticized for their complexity, high costs, resistance to standardization, weak environmental integrity and susceptibility to gaming Additionality consideration has focused on “intent” Additionality tool – reaction mixed Criticized for its project-by-project approach and a focus on investment additionality; may have led to a narrow interpretation of additionality

Additionality Actions taken to address controversy surrounding this issue – EB received 22 public submissions in March 2006 and will report back at COP/MOP2 Many of the submissions are consistent with issues raised in this paper: –The focus of additionality should be environmental additionality –The selection of the baseline scenario should be combined with the additionality assessment –The draft baseline scenario tool be merged with the additionality tool –Simplified additionality tool –Positive list of project types that would automatically be additional

Additionality – Options for Fostering the Development Dividend Short-term Development of tools/assessment methods based on environmental additionality Medium to Long-term Additionality assessment through multi-project baselines based on benchmarks or performance standards Develop a positive list of projects that do not require an additionality test

Programmatic CDM Decision to include programs in CDM, coupled with EB decision on national/ sectoral policies may have opened door to increased development dividend Chapter 1 concluded that programmatic CDM demonstrates a strong ability to generate CERs as well as SD benefits

Programmatic CDM – Challenges/Barriers Immediate concern – obtaining approval for methodologies from the EB Specific methodological requirements may pose challenges – project boundary, leakage, baselines, additionality, free riders, double counting, crediting period, monitoring EB has received public comments on programmatic CDM, which the Meth Panel will use to prepare a list of options

Programmatic CDM – Options for Fostering the Development Dividend Short-term Timely approval of programmatic CDM methodologies to lay groundwork and indicate how Montreal decision will be interpreted Project development and submission of methodologies to ensure a variety of sectors benefit in the short term Analysis of the nature of opportunities presented through programmatic CDM, including analysis of the 14 projects and related methodologies with programmatic characteristics (as noted in Chapter 1) to identify lessons for CDM project developers Medium- to Long-Term Capacity building to develop programmatic baselines and additionality tools

Small Scale CDM Projects TypeTotal # ProjectsTotal # SS Projects % of Total Projects that are SS % of Type of Total SS Projects Biomass energy %27.1% Hydro %23.4% EE industry %12.0% Wind %9.8% Agriculture %9.0% Landfill gas %4.4% Biogas %4.9% Fossil fuel switch %3.7% EE service10 100%2.4% Other %3.4% Total of all project types %100%

Small Scale CDM Projects Level of Development/Total Country for CDMNumber2012 kCERs ProjectsTotalSS% of SS totalSS % of SS Least Developed Countries % % Other Low Income Countries % % Lower Middle Income Countries % % Upper Middle Income Countries % % More Advanced Countries % % World % %

Small scale CDM Projects – Challenges/Barriers High transaction costs relative to expected emission reduction benefit and upfront nature of costs Definition of projects – renewable energy, energy efficiency may not be equitably defined EB requested input on barriers to developing small scale energy efficiency projects in August 2006 – submissions indicate that current definition poses a barrier because the allowable size is too small, transaction costs are high and post-2012 uncertainty is a deterrent

Small scale CDM Projects – Challenges/Barriers Small scale biomass projects have proven to be problematic as the EB has not been able to make a decision on how to judge these projects. Issue will go back to the COP in November In September 2005 non-renewable biomass was removed as a baseline methodology to address concerns of that these project might circumvent the prohibition of deforestation avoidance in the CDM Projects that reduce the consumption of non-renewable biomass, such as improved biofuel stoves, have significant development dividends, but are not currently eligible as CDM projects

Small Scale CDM Projects – Options for Fostering the Development Dividend Short-term Redefine small scale projects to focus on environmental impacts Simplified procedures for small scale projects based on Development Dividend criteria Encourage the development and approval of methodologies for non- renewable biomass CDM projects Medium- to Long-term Develop a positive list of small scale projects/sectors that do not require an Additionality Test

Expanding LULUCF Projects Two A/R projects, China and India, at the validation stage Three approved methodologies May be an important area for the Development Dividend, as opportunity to involve countries with few energy-based CDM projects

Expanding LULUCF Projects – Challenges/Barriers Sinks projects expected to play a minor role in the 1 st commitment period – technical difficulties, long-term nature of investments, and controversial Concern that sinks projects divert resources from urgent task of reducing fossil fuels related to GHG emissions “Bad” projects (e.g., monoculture plantations with few community benefits) Expiring nature of tCERs and lCERs EU-ETS at present excludes forestry projects

Expanding LULUCF Projects – Reducing Forest Degradation and Deforestation Consensus emerging that addressing emissions from tropical deforestation is becoming an accepted piece of the international climate regime Papua New Guinea and Costa Rica Proposal at COP-11/MOP-1 – given the significance of land use based emissions in a number of developing countries, controlling deforestation has considerable potential for climate mitigation and should be recognized as an abatement activity Increasing the Development Dividend of the CDM through avoided deforestation will be dependent on the outcomes of the discussions of the PNG and Costa Rica submission

Expanding LULUCF Projects – Options for Fostering the Development Dividend Short-term Encourage the inclusion of credits from A/R projects in the EU-ETS Medium- to long-term Expand the definition of CDM LULUCF projects to include avoided deforestation (depending on the outcomes of the discussion of the PNG and Costa Rica submission)

Fostering CDM Investment in LDCs Country/ Level of Development # Projects% of Total Projects 2012 kCERs % of Total 2012 kCERs Least Developed Countries Bangladesh Bhutan Cambodia Laos Nepal Tanzania Uganda % 0.3% 0.1% 0.2% 0.1% % 0.2% 0.0% 0.1% 0.0% Other Low Income % % Lower Middle Income % % Upper Middle Income % % Other More Advanced192.2% % World860100% %

Fostering CDM Investment in LDCs Challenges/Barriers Lack of capacity – 22 of 48 have DNAs Market-based nature of mechanism determines that many LDCs not attractive to investors Nature of opportunities – many investors seeking short-term rapid generation of CERs, many opportunities in LDCs are in renewables and A/R, which create relatively few emissions over a long time period.

Options for Promoting the Development Dividend in LDCs Medium to Long-term Use public procurement programs to purchase CERs from LDCs Establish the fundamentals to ensure LDCs are sources of CERs in the post regime

Options for Fostering the Development Dividend Short-term Development of Additionality Tools based on environmental additionality Timely approval of Programmatic CDM methodologies Analysis of the nature of opportunities presented through programmatic CDM; examination of 14 CDM projects with programmatic characteristics Redefine small scale projects to focus on environmental impacts Simplified procedures for small-scale projects Encourage the development and approval of methodologies for non- renewable biomass CDM projects Encourage the inclusion of credits from Sinks projects in the EU- ETS

Options for Fostering the Development Dividend Long-term Capacity building to develop programmatic baselines and additionality tools Additionality assessment through multi-project baselines based on benchmarks or performance standards Develop a positive list of small scale projects/sectors that do not require an additionality test Expand the definition of CDM LULUCF projects to include avoided deforestation (depending on the outcomes of discussion on the PNG and Costa Rica proposal) Public procurement programs to purchase CERs from LDCs Establish the fundamentals to ensure LDCs are sources of CERs in the post-2012 regime