The Development Dividend

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Project Snapshot

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 toward the elaboration of the CDM.

The Development Dividend project responded to 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 too few projects were making their way through the project approval process, at too high a price, 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 could we do to improve both the quantity and quality of CDM projects? This had become a critical issue, as it had become evident that the vast majority of purchasers during the initial Kyoto phase were likely to be governments representing Annex B parties (parties with reduction commitments under the Kyoto Protocol). These governments were extremely sensitive to domestic pressure for international investments in greenhouse gas reductions to provide real environmental and commercial benefits and, at the same time, for these projects to be cost-effective. The Development Dividend project was about trying to find a meaningful place in the international carbon market for CDM projects that provide significant benefits beyond greenhouse gas reductions. These include environmental and human health benefits such as improved air quality, social benefits such as improved quality of life through the provision of electricity, and the economic benefits that can accompany increased foreign direct investment, such as increased incomes and employment.

The Development Dividend project completed three phases of research: Phase I, from September 2004 to August 2005; Phase II, from September 2005 to September 2006; and Phase III, from October 2006 to March 2008.

The Development Dividend project was supported by the governments of Canada, Denmark, Finland and Norway, and by the UNDP.

Phase I

The initial work 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 problems identified, looking at those areas where progress could 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

By 2007 the CDM looked very different compared with when IISD started the Development Dividend project. The number of projects had increased substantially, and the variety of project types was greater, with substantial growth in energy-efficiency projects, wind-energy projects and agriculture projects. The growing number of approved and consolidated methodologies made the CDM approval journey much easier for those project proponents who followed the original pioneers. This growth and broadening of sectors was positive, yet research and broader discussion and debate indicated that some cause for concern remained 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 included further refinement of the development dividend measurement framework and examination of the CDM, or a 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) took a first step toward understanding the implications of the various possible climate regimes on the shape and iteration of an MMSD. The paper began with an analysis that considered the range of options being proposed for the post-2012 regime, and then asked 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 examined characteristics of regime structures—targets, differentiation, transition and governance—as they related to MMSD and development dividend considerations.

The paper Market Mechanisms for Sustainable Development in a Post-2012 Climate Regime: Implications for the Development Dividend (PDF - 181 KB) was completed at the end of this phase of the project. It examined four regime options—increasing the scope of the CDM to include additional sectors, differentiation of developing-country eligibility, expanding the CDM, and a fund-based mechanism—and their potential impacts on the three elements of the development dividend: quality (sustainable development), quantity (volume of certified emission reductions) and regional distribution.

Development Dividend Task Force

A 30-member international Development Dividend Task Force (PDF - 54 KB)—composed of on-the-ground experts on the CDM representing civil society, governments, financial institutions, stock traders, research organizations and industry—guided the work of the project. The task force held five meetings over its lifetime. The following task force meeting reports are available:

Outreach and Consultation

Extensive outreach and consultation took place over the life of the project, including the following side events at meetings of the Conference of the Parties serving as the Meeting of the Parties and subsidiary bodies: