Enhancing Sustainable Development Tools in Carbon Markets

1. Karen Holm OlsenUNEP DTU PartnershipSenior Researcher DEHSt Side Event The CDM Sustainable Development Tool – Assessment and Options for Improvement27 May 2015, 15.30-16.30, Room 11, Level 0, Carbon Expo, Barcelona Christof ArensWuppertal Institute Project Co-ordinator

2. Outline of side event • Aim: • Presenting and discussing findings from recent study „Analysis and Evaluation of the Usability of the CDM EB’s SD Tool“ • Commissioned by German Emissions Trading Authority • Conducted by UNEP DTU & Wuppertal Institute • Agenda: • Presentation of the study: Karen Hom Olsen, Christof Arens • Reaction from panelists: Ulrika Raab, Edwin Aalders, Niclas Svennigsen • Discussion / Interactin with audience

3. Structure of project & the presentations today • Step 1: Assessing Sustainable Development (SD) provisions of selected mitigation mechanisms and comparing them with the CDM SD tool (Arens) • Step 2: Literature review and interviews with stakeholers on usability of the SD tool (Olsen) • Step 3: Synthesis and recommendations (Arens)

4. Step 1: Comparing SD provisions of selected mitigation mechanisms • Literature review on best practice approaches and methods • Selection of 8 approaches to Sustainability assessment for comparison: • project-based: • Crown Standard • CDM Gold Standard • SocialCarbonMethodology • Climate, Community andBiodiversity(CCB Standards) • wider UNFCCC: • UN REDD Programme • UNDP NAMA SD Tool • MDB safeguards: • ADB SafeguardPolicy • IFC SustainabilityPolicy

5. Methodology • Definition of three initial assessment categories with corresponding criteria in large matrix • Synthesis of information • Condensation into four final overarching categories: • Scope • Type of assessment • Review and evaluation • Stakeholder consultation framework

6. Findings of first working step • Scope • Assessment types • Monitoring and evaluation • Stakeholder processes

7. Scope • Project-based approaches assess sustainability in narrow boundaries (logic of carbon offset projects) • Safeguards of the MBS: very wide assessment boundaries due to need to assess positive and negative effects of high variety of intervention types • Focus on limited number of projects types facilitates development of stringent methodologies and indicators

8. Assessment Types • All except SD tool: assessment of co-benefits as well as co-costs • Scoring approaches are a common method to gauge the degree of positive/negative contributions of an activity • Exclusion criteria (e.g. negative/positive lists) also common • Assessment of effects on SD frequently through check lists pre-defining parameters and criteria (SD tool approach especially noteworthy)

9. Measuring & Evaluation, Stakeholder Processes • Common: ex-ante assessment of expected impacts, monitoring of activities over project duration • Some approaches, e.g. GS, require independent validation • MDBs: continuous monitoring, environmental and social management systems (risk category 1) • Others: larger gaps between monitoring activitiese.g. NAMA SD tool: three-year intervals • Stakehoder processes integral part of most analyzed approaches – local but also global • Grievance mechanisms mandatory in MDB safeguards (individual appeals possible in certain cases) • CCB and GS require independent mediators for arbitration processes

10. Summary • highly differentiated requirements for SD assessment • SD Tool in its current form quite limited • Shortcomings: • no coverage of negative impacts, missing safeguards • no monitoring & evaluation • no stakeholder requirements, grievance mechanism • Inclusion of these elements could strengthen CDM as a whole

11. Step 2Usefulness of the CDM EB SD tool

12. Outline: • Objective, methods and data • Synopsis of literature reviewed • Interview findings • Usability of the CDM EB SD tool - Synthesis

13. Objective, methods & data Objective: To assess the appropriateness of the EB’s voluntary SD tool against host country needs for sustainability assessments of CDM projects and other user perspectives incl. how the SD tool may assist DNAs, project proponents and buyers in broadening consideration for SD Methods: The work package comprises three steps: 1) Literature review of DNA and SD tool user practices for SD assessment of CDM projects, 2) Interviews with selected host country and project proponent’s experiences and needs for using the EB’s SD tool and for sustainability assessment of other mitigation actions, 3) Assessment and analysis of survey results and literature with regard to host country needs and difficulties Data: Out of 377 peer-reviewed articles on the topic of ‘CDM and sustainable development’ found in the Web of Science by January 2015, the review covers 18 studies incl. technical and policy papers focusing on the subset of articles on governance of the CDM’s contribution to SD and particularly the role of host country DNAs. Eight in-depth interviews were conducted in the period December 2014 and January 2015 with four DNAs (Brazil, China, Uganda and Cambodia), three project developers (Norway, Chile, Switzerland) and one buyer (Government of Sweden)

14. Synopsis of literature reviewed Three issues: • State of knowledge on the CDM’s contribution to SD: • Key challenges are: 1) The lack of a common definition of what sustainable development means, which makes it hard to measure and compare SD impacts across countries in an objective manner; 2) The trade-off between the two objectives of the CDM known as a ‘race-to the-bottom’ where competition among host countries for CDM investment creates an incentive to lower the SD standards to attract investment • The High-Level Panel of the CDM Policy Dialogue in 2012 concluded that ‘it is not possible to reach a definitive conclusion on the sustainable development impacts of the CDM to date, given the insufficiency of objective data’ (Dialogue 2012) • Governance of the CDM’s contribution to sustainable development • A project-by-project approval of SD in CDM projects is the most widely used approach. Overall, three types of approaches exist: 1) Assessment based on checklists and SD criteria; 2) A fund for sustainable development based on taxes and levies differentiated by project types and 3) Certification of projects according to an international or national standard for SD assessment (Koakutsu, Tamura et. al., 2012) • The market demand for labelled credits is directly related to evidence suggesting ‘that host countries are failing to ensure SD benefits of CDM projects’ (Parnphumeesup and Kerr 2011). • Evaluation of the EB’s SD tool • An evaluation of the use of the tool was carried out in July 2014 with a survey being sent to 4,626 stakeholders (UNFCCC, 2014). The SD tool is found to meet its objective as a voluntary measure to highlight the co-benefits of CDM activities, while maintaining the prerogative of Parties to define their national sustainable development criteria.

15. Interview findings (1)

16. Interview findings (2)

17. Interview findings (3)

18. Usability of the EB SD tool – a synthesis • The SD tool is not directly useful to DNAs, as it is meant for PPs to use • Yet, the UNFCCC evaluation (2014) found that most DNAs plan to refer to the tool, when conducting SD assessment for approval of CDM projects at national level (92%) • The tool is similar to the checklist approach of most host countries. It does not give an international definition of what SD means but facilitates a structured comparison that respects Parties’ prerogative to decide on national priorities • From the interviews and the literature review there is a clear, emerging interest to follow-up that SD claims are met • From the perspective of users of the SD tool, all interviewees find it very useful and simple as a standardized, qualitative approach to SD assessment. However, a number of weaknesses are identified, particularly avoiding negative impacts and attracting a premium price for carbon credits with high sustainable development benefits • Comparing user needs with host country DNA practices for SD assessment, national standards fall short of meeting expectations in the premium market

19. Relevance of the SD tool beyond CDM Overall, SD tool experience can be relevant to CDM and other mitigation actions in three ways: • Strengthened standards for SD assessment at the international level • Enhanced national standards for SD assessment based on the SD tool, e.g. by making it mandatory at national level for PPs to use the tool for issuance of LoAs and by including the SDC report as a basis for local stakeholder consultations, and • Market players could seek certification of SD impacts of mitigation actions based on the tool being further developed in line with general requirements for results-based finance applicable beyond CDM

20. Step 3Conclusions and Recommendations

21. Methodology of Step 3 • Matrix with different ‘offers‘ of SD assessment in different approaches (Step 1) • SD reporting ‘needs‘ voiced by practitioners in the interviews (Step 2) • Recommendations in two consecutive levels: • Level 1: Improvements to the SD tool • Level 2: Enhancement of the SD tool

22. Matrix matching „needs“ & „offers“

23. Level 1 Recommendations (Amendments) • Introduce no-harm safeguardsAssessing negative impacts, p.ex. based MDGs • Develop monitoring and reporting guidelines Optional since EB82 – thorough guidance, separate from GHG monitoring • Introduce 3rd Party validation and verification of SD claims Enhancing credibility of SDC reports; separate from GHG assessment • Link enhanced stakeholder requirements to the CDM SD toolUse SDC reports as basis; combine with option for grievance mechanism

24. Level 2 Recommendations (Enhancements) • Introduce UNFCCC certification of SD co-benefits -Meet interest in national certification (see Thailand); - Develop UNFCCC certification framework for DNAs with low capacity • Create a global standard for quantification of SD co-benefitsEstablish a value as basis for willingness to extra payment • Develop a global approval standard for quantification methodologies, • Allow PPs and others to develop methods for SD co-benefits quantification compatible with their needs, and • Assign an institution (e.g. Meth Panel) for the approval procedure of these methods

25. Outlook • Enhanced CDM SD tool can set robust standards beyond CDM • Linking and harmonization with emerging mechanisms (NMM, NAMAs...) • Not only Carbon, also development relevance (Sustainable Development Goals) • Globally harmonized SD assessment has multiple benefits: • Comparable across mechanisms • Mainstreamed into national development planning • Integrated into national performance measurement • Ensures compliance with international requirements (e.g. GCF)

26. Thank you! For more information, please contact the project team: Christof Arens Karen Holm Olsen Florian Mersmann Joergen Fenhann Frederic Rudolph Miriam Hinostroza Christiane Beuermann Fatemeh Bakhtiari