Options to Foster the Development Dividend

1. Options to Foster the Development Dividend Meeting of the Expert Task Force of the IISD Development Dividend Project March 27-28, 2006 Vancouver Deborah Murphy, IISD

2. Outline of Presentation • Objective of the Paper • Options • Additionality • Programmatic CDM • Small-scale CDM projects • Expanding the roles for sinks projects • Brazilian case study • Improved regional distribution

3. Options for Fostering the CDM:Objective of Paper • Explore options, with an emphasis on improving the Development Dividend (quality and quantity) of CDM projects • Address the concerns noted in the original paper – business noting that there were too few projects at too high a price, with developing countries and civil society noting that projects did not meet SD priorities

4. Additionality • Actions taken to address controversy surrounding this issue – EB has requested input and will report back at COP/MOP2 • EB ruling in Nov. 2005 attempts to address perverse incentive related to additionality and the CDM – countries not penalized for enacting progressive policies/ regulations as baseline can account for situation prior to adoption of KP

5. Additionality – Challenges/Barriers • Methods to address additionality have been criticized for their complexity, high cots, resistance to standardization, weak environmental integrity and susceptibility to gaming • A key criticism – additionality consideration has focused on “intent”

6. Additionality – Challenges/Barriers • 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 and many believe the use of the tool is mandatory in practice.

7. 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

8. Programmatic CDM • Decision to includes programs in CDM, coupled with decision on national/sectoral policies may have opened door to increased development dividend • Programmatic CDM is similar to single-site projects, as must comply with all procedures and modalities of the CDM.

9. 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

10. Programmatic CDM – Options for Fostering the Development Dividend Short-term • Timely approval of programmatic CDM methodologies • Analysis of the nature of opportunities presented through programmatic CDM Medium- to Long-Term • Capacity building to develop programmatic baselines and additionality tools

11. Small-scale CDM Projects

12. Small-scale CDM Projects

13. Small-scale CDM Projects – Challenges/Barriers • High transaction costs relative to expected emission reduction benefit and upfront nature of costs • Rules for bundling may limit the number of CDM projects in a bundle and not allow developers to meet critical mass • Definition of projects – renewable energy, energy efficiency and other projects may not be equitably defined

14. 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 Medium- to Long-term • Develop a positive list of Small-scale projects/sectors that do not require an Additionality Test

15. Expanding Sinks Projects • Two A/R projects, China and India, at the validation stage • One approved methodology for large-scale projects, one for SS A/R projects • May be an important area for the Development Dividend, as opportunity to involve countries with few energy-based CDM projects

16. Expanding Sinks Projects – Challenges/Barriers • Sinks projects expected to play a minor role in the 1st 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

17. Expanding Sinks Projects – Avoided Deforestation: Case Study from Brazil • A/R projects can contribute to DD, but avoided deforestation has potential to make large contribution. • Potential for Brazil’s principle contribution toward GHG emission reductions through control and avoidance of deforestation in the Amazon – releases 200 M tons of CO2/yr

18. Sinks Case Study: Brazil • Proposed economic development plans in the Amazon could convert 120,000 to 270,000 km2 in in next 25-35 years. In the order of 2.5 to 6 billion tons of C in the same time period. • Development projects such as PROAMBIENTE, could help to control deforestation and frontier expansion through sustainable economic alternatives.

19. Sinks Case Study: Brazil • Based on reformulation of government program of agricultural credit. Credit provided to farmers who invest sustainable forms of agriculture and forest conservation. • 3 pools of money – Agricultural credit fund for agricultural investments • Environmental fund will compensate farmers for investments in environmental protection, up to 40% of total agricultural loan value. • Support Fund will be used to set up regional centres that provide outreach, training, including monitoring of carbon

20. Sinks Case Study: Brazil • Phase I expected to result in 960,000 tons of avoided CO2 emissions per year and 150,000 tons of sequestered carbon • Environmental benefits: lower incidence of fire, lower sedimentation, increased biodiversity values • Socio-economic benefits: increased employment, higher income, lower incidence of water-related illness, improved nutrition

21. Expanding Sinks Projects – Options for Fostering the Development Dividend Short-term • Encourage the inclusion of credits from sinks projects in the EU-ETS Medium- to long-term • Expand the definition of CDM Sinks projects to include avoided deforestation

22. Improved Regional Distribution

23. Improved Regional Distribution of CDM Projects – Challenges/Barriers • Lack of capacity – 18 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.

24. Improved Regional Distribution – Options for Fostering the Development Dividend Medium to Long-term • Establish the fundamentals to ensure LDCs are sources of CERs in the post-21012 regime

25. 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 • Redefine Small-scale Projects to focus on environmental impacts • Simplified procedures for Small-Scale Projects • Encourage the inclusion of credits from Sinks projects in the EU-ETS

26. 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 Sinks projects to include avoided deforestation • Public procurement programs to purchase CERs from LDCs • Establish the fundamentals to ensure LDCs are sources of CERs in the post-2012 regime