The Development Dividend

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  • Market Mechanisms for Sustainable Development: How Do They Fit in the Various Post-2012 Climate Efforts? (PDF - 624 kb) » Written by Aaron Cosbey, Deborah Murphy and John Drexhage, IISD This new report, developed under IISD's Development Dividend Project, takes a first step at understanding the implications of the various possible climate regimes on the shape and iteration of a market mechanism for sustainable development (MMSD). The paper begins with an analysis that considers the range of options being proposed for the post-2012 regime and then asks what potential role an MMSD might play in these regimes, and what the various sorts of MMSDs might imply for the nature of the overall regime. The second part of the paper examines characteristics of regime structures—targets, differentiation, transition and governance—as they relate to an MMSD and development dividend considerations.



Background

The Clean Development Mechanism (CDM) enables industrialized countries with commitments under the Kyoto Protocol to invest in greenhouse gas reduction opportunities in developing countries and generate emission reduction credits (called Certified Emission Reductions) that can be applied toward their reduction targets. For host countries, the CDM presents an opportunity to receive foreign investment that could work to enhance local sustainable practices, and increase the transfer of environmentally-sound technology. Since its conceptualization in 1997, considerable progress has been made towards the elaboration of the CDM.

The Development Dividend project is the result of two concerns that arose during the initial implementation of the CDM. On the one hand, the private sector expressed concerns about the lengthy time and relatively high transaction costs associated with potential investments in the CDM. On the other hand, those projects that were relatively cost effective, such as HFC-23 destruction, provided little or no intrinsic sustainable development benefits. To put it more succinctly, business was saying there were too few projects, at too high a price, making their way through the project approval process; while developing countries and civil society expressed concerns that projects were not addressing sustainable development priorities, one of the objectives of the CDM.

The Project

IISD launched the idea of a Development Dividend in response to these two concerns. In other words, what can we do to improve both the quantity and quality of CDM projects? This has become a critical issue as it has become evident that the vast majority of purchasers during the initial Kyoto phase are likely to be governments representing Annex B Parties (Parties with reduction commitments under the Kyoto Protocol). These governments are extremely sensitive to domestic pressure that international investments in greenhouse gas (GHG) reductions provide real environmental and commercial benefits and that, at the same time, these projects be cost effective. The Development Dividend is about trying to find a meaningful place in the international carbon market for CDM projects that provide significant benefits beyond GHG reductions. These include environmental/human health benefits such as improved air quality, social benefits such as improved quality of life through provision of electricity, and the economic benefits that can accompany increased foreign direct investment, such as increased incomes and employment.

The Development Dividend has completed two phases of research; Phase 1 from September 2004 to August 2005, and Phase 2 occurring from September 2005 to September 2006. Phase 3 activities are currently underway and are expected to be completed by March 2008.

The Development Dividend Project is supported by the Governments of Canada, Denmark, Finland and Norway, and the UNDP.

Phase I

The initial work of the project assessed the current crop of CDM projects and found cause for concern on three fronts: Quality, Quantity, and Distribution of projects. The research concluded that the CDM has great potential to promote a development dividend, but only if some changes are made. The Development Dividend Phase I Report offered a number of recommendations to address the identified problems, looking at those areas where progress can be made immediately (outside of negotiations); at those areas where we can make negotiated progress in the first commitment period; and at post-2012 options. An executive summary and full version of the paper are available.

Phase II

The CDM looks very different today than three years ago—when IISD started the Development Dividend Project. There has been a large increase in the number of projects, and there is a greater variety of project types, with substantial growth in energy efficiency projects, wind energy projects and agriculture projects. The growing number of approved methodologies and consolidated methodologies makes the CDM approval journey much easier for those project proponents that follow the original pioneers. This growth and broadening of sectors is positive, yet, research and broader discussion and debate indicate that there remains some cause for concern with respect to the development dividend—the quality and quantity of CDM projects.

IISD, working in collaboration with select Task Force members, examined these concerns in a Phase II report, Making Development Work in the CDM (PDF - 1 mb). The report broadened and deepened the analysis on the development dividend, focusing on:

Phase III

Phase III includes further refinement of the Development Dividend Measurement Framework and examination of the CDM or similar Market Mechanism for Sustainable Development (MMSD) in the post-2012 climate regime. The report, Market Mechanisms for Sustainable Development: How Do They Fit in the Various Post-2012 Climate Efforts? (PDF - 624 kb) takes a first step at understanding the implications of the various possible climate regimes on the shape and iteration of an MMSD. The paper begins with an analysis that considers the range of options being proposed for the post-2012 regime and then asks what potential role an MMSD might play in these regimes, and what the various sorts of MMSDs might imply for the nature of the overall regime. The second part of the paper examines characteristics of regime structures—targets, differentiation, transition and governance—as they relate to an MMSD and development dividend considerations.

Development Dividend Task Force

A 30 member international Development Dividend Task Force (PDF - 54 kb)—comprised of on-the-ground experts on the CDM representing civil society, governments, financial institutions, stock traders, research organizations and industry—guides the work of the project. The Task Force held five meetings, the most recent in Oslo, Norway in October 2007. The following Task Force meeting reports are available:

Outreach and Consultation

Extensive outreach and consultation has taken place over the life of the project, including side events at the COPs/MOPs and Subsidiary Body meetings. The most recent side event, Market Mechanisms for Sustainable Development (MMSDs): Achieving benefits for developing countries post-2012 (PDF - 57 kb), was held in Bonn, Germany at the 26th Sessions of the Subsidiary Bodies. The session was moderated by John Drexhage and Deborah Murphy provided an overview of IISD’s analytical paper on MMSDs (PPT - 213 kb). The following panel members provided comments on IISD’s analytical paper on MMSDs during this event:

A side event report is available (PDF - 33 kb), and coverage of this event was provided by ENB on the Side.

Other side events were held at the:

For copies of presentations made at these side events, or more information on the Development Dividend Project, please e-mail: Deborah Murphy.