Options to Foster the Development Dividend

Meeting of the Expert Task Force of the IISD Development Dividend Project

October 19-20, 2006 Copenhagen

Deborah Murphy, IISD

Outline of Presentation• Objective of the Paper

• Options– Additionality– Programmatic CDM– Small-scale CDM projects– Expanding the roles for LULUCF projects– Increasing CDM investment in LDCs

Options for Fostering the CDM:Objective of Paper

• Explore options, with an emphasis on increasing the amount of CERs delivering a strong Development Dividend

• Address the concerns noted in Chapter 1 – that international investment in reducing GHG emissions provide real environmental and commercial benefits, and at the same time, be cost effective

Additionality – Challenges/Barriers

• Methods to address additionality have been criticized for their complexity, high costs, resistance to standardization, weak environmental integrity and susceptibility to gaming

• Additionality consideration has focused on “intent”• 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

Additionality

• Actions taken to address controversy surrounding this issue – EB received 22 public submissions in March 2006 and will report back at COP/MOP2

• Many of the submissions are consistent with issues raised in this paper:– The focus of additionality should be environmental additionality – The selection of the baseline scenario should be combined with the

additionality assessment– The draft baseline scenario tool be merged with the additionality tool– Simplified additionality tool– Positive list of project types that would automatically be additional

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

• Develop a positive list of projects that do not require an additionality test

Programmatic CDM

• Decision to include programs in CDM, coupled with EB decision on national/ sectoral policies may have opened door to increased development dividend

• Chapter 1 concluded that programmatic CDM demonstrates a strong ability to generate CERs as well as SD benefits

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

• EB has received public comments on programmatic CDM, which the Meth Panel will use to prepare a list of options

Programmatic CDM – Options for Fostering the Development Dividend

Short-term• Timely approval of programmatic CDM methodologies to lay

groundwork and indicate how Montreal decision will be interpreted• Project development and submission of methodologies to ensure a

variety of sectors benefit in the short term• Analysis of the nature of opportunities presented through

programmatic CDM, including analysis of the 14 projects and related methodologies with programmatic characteristics (as noted in Chapter 1) to identify lessons for CDM project developers

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 194 111 57.2% 27.1%

Hydro 145 96 66.2% 23.4%

EE industry 110 49 44.5% 12.0%

Wind 100 40 40.0% 9.8%

Agriculture 91 37 40.7% 9.0%

Landfill gas 75 18 24.0% 4.4%

Biogas 32 20 62.5% 4.9%

Fossil fuel switch 32 15 46.9% 3.7%

EE service 10 10 100% 2.4%

Other 71 14 19.7% 3.4%

Total of all project types 860 410 47.7% 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 10 7 70.0% 3905 1376 35.2%

Other Low Income Countries 350 204 58.3% 262636 46917 17.9%

Lower Middle Income Countries 280 118 42.1% 211385 35349 16.7%

Upper Middle Income Countries 201 72 35.8% 465990 30269 6.5%

More Advanced Countries 19 9 47.4% 91932 987 0.3%

World 860 410 47.7% 1035850 114898 11.1%

Small scale CDM Projects – Challenges/Barriers

• High transaction costs relative to expected emission reduction benefit and upfront nature of costs

• Definition of projects – renewable energy, energy efficiency may not be equitably defined

• EB requested input on barriers to developing small scale energy efficiency projects in August 2006 – submissions indicate that current definition poses a barrier because the allowable size is too small, transaction costs are high and post-2012 uncertainty is a deterrent

Small scale CDM Projects – Challenges/Barriers

• Small scale biomass projects have proven to be problematic as the EB has not been able to make a decision on how to judge these projects. Issue will go back to the COP in November

• In September 2005 non-renewable biomass was removed as a baseline methodology to address concerns of that these project might circumvent the prohibition of deforestation avoidance in the CDM

• Projects that reduce the consumption of non-renewable biomass, such as improved biofuel stoves, have significant development dividends, but are not currently eligible as CDM projects

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• Encourage the development and approval of methodologies for non-

renewable biomass CDM projects

Medium- to Long-term• Develop a positive list of small scale projects/sectors that do not

require an Additionality Test

Expanding LULUCF Projects

• Two A/R projects, China and India, at the validation stage

• Three approved methodologies • May be an important area for the

Development Dividend, as opportunity to involve countries with few energy-based CDM projects

Expanding LULUCF 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 LULUCF Projects – Reducing Forest Degradation and Deforestation

• Consensus emerging that addressing emissions from tropical deforestation is becoming an accepted piece of the international climate regime

• Papua New Guinea and Costa Rica Proposal at COP-11/MOP-1 – given the significance of land use based emissions in a number of developing countries, controlling deforestation has considerable potential for climate mitigation and should be recognized as an abatement activity

• Increasing the Development Dividend of the CDM through avoided deforestation will be dependent on the outcomes of the discussions of the PNG and Costa Rica submission

Expanding LULUCF Projects – Options for Fostering the Development Dividend

Short-term• Encourage the inclusion of credits from A/R

projects in the EU-ETS

Medium- to long-term• Expand the definition of CDM LULUCF projects

to include avoided deforestation (depending on the outcomes of the discussion of the PNG and Costa Rica submission)

Fostering CDM Investment in LDCsCountry/ Level of Development

# Projects % of Total Projects

2012 kCERs

% of Total 2012 kCERs

Least Developed Countries

Bangladesh

Bhutan

Cambodia

Laos

Nepal

Tanzania

Uganda

10

3

1

1

1

2

1

1

1.2%

0.3%

0.1%

0.1%

0.1%

0.2%

0.1%

0.1%

3905

1952

4

293

44

696

672

245

0.4%

0.2%

0.0%

0.0%

0.0%

0.1%

0.1%

0.0%

Other Low Income 350 40.7% 262636 25.4%

Lower Middle Income 280 32.6% 211385 20.4%

Upper Middle Income 201 23.4% 465990 45.0%

Other More Advanced 19 2.2% 91932 8.9%

World 860 100% 1035850 100%

Fostering CDM Investment in LDCs Challenges/Barriers

• Lack of capacity – 22 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.

Options for Promoting the Development Dividend in LDCs

Medium to Long-term• Use public procurement programs to purchase

CERs from LDCs• 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; examination of 14 CDM projects with programmatic characteristics

• Redefine small scale projects to focus on environmental impacts • Simplified procedures for small-scale projects • Encourage the development and approval of methodologies for non-

renewable biomass CDM 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 LULUCF projects to include avoided

deforestation (depending on the outcomes of discussion on the PNG and Costa Rica proposal)

• Public procurement programs to purchase CERs from LDCs• Establish the fundamentals to ensure LDCs are sources of CERs in

the post-2012 regime