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

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

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

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

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”

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.

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

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.

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

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

Small-scale CDM ProjectsType Total # Projects Total # SS

Projects% of Total

Projects that are SS

% of Type of Total SS Projects

Biomass energy 154 89 57.80% 29.70%

Hydro 109 76 67.90% 24.70%

EE industry 82 41 50% 13.70%

Wind 76 32 44.70% 11.30%

Agriculture 70 19 27.10% 6.30%

Biogas 24 14 58.30% 4.70%

Fossil fuel switch 28 11 39.30% 3.70%

Solar 5 5 100% 1.70%

Landfill gas 52 4 7.70% 1.30%

Other 54 9 3.00%

Total of all project types 654 300 45.90% 100%

Small-scale CDM ProjectsLevel of Development/ Total

Country for CDM Number 2012 kCERs

Projects Total SS % of SS  total SS % of SS

Least Developed Countries 9 6 66.70% 3877 1279 33.00%

Other Low Income Countries 277 169 61.00% 236405 36930 15.60%

Lower Middle Income Countries 223 87 39.00% 184256 25231 13.70%

Upper Middle Income Countries 133 35 26.30% 335941 7853 2.30%

More Advanced Countries 12 3 25.00% 75787 242 0.30%

World 654 300 45.90% 836266 71535 8.60%

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

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

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

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

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

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.

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

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

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

Improved Regional DistributionLevel of Development/Country In Pipeline Reg. request Registered

  Number % Number Number

Least Developed Countries 9 1.60%   4

Bangladesh 3 0.50%   1

Bhutan 1 0.20%   1

Cambodia 1 0.20%    

Nepal 2 0.30%   2

Tanzania 1 0.20%    

Uganda 1 0.20%    

Other Low Income Countries 277 42.60% 4 34

India 260 39.80% 3 30

Other Low Income Countries 17 2.80% 1 4

Lower Middle Income 223 34.20% 9 56

Upper Middle Income 133 20.30% 10 39

Other More Advanced 12 1.80% 1 3

World 654 100.00% 24 136

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.

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

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

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