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Market Mechanisms for Sustainable Development: Achieving Benefits for Developing Countries Post-2012

Market Mechanisms for Sustainable Development: Achieving Benefits for Developing Countries Post-2012. IISD Side Event 26 th SB Meetings May 16, Bonn Deborah Murphy, IISD. Introduction.

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Market Mechanisms for Sustainable Development: Achieving Benefits for Developing Countries Post-2012

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  1. Market Mechanisms for Sustainable Development: Achieving Benefits for Developing Countries Post-2012 IISD Side Event 26th SB Meetings May 16, Bonn Deborah Murphy, IISD

  2. Introduction Number of proposed approaches put forward for post-2012, but scope and role of CDM or other MMSD – Market Mechanism for Sustainable Development – is not entirely clear Study to examine how an MMSD that meets the goals of the current CDM could fit in post-2012 efforts Top-down analysis Bottom-up analysis Regime characteristics Impacts on development dividend Concluding comments

  3. Different Views of What Constitutes an Effective Mechanism • Developed Countries – access to low-cost credits; additionality; means to engage developing countries; means to encourage large emitting developing countries to go beyond the CDM • Developing Countries – sustainable development; technology transfer; equity of access and regional distribution; robust demand for credits; integrity of mechanism

  4. Development Dividend Perspective Understanding how the potential regimes could assist in improving the: Quality - sustainable development benefits Quantity - accessible and cost-effective Enhancing the regional distribution of CDM projects

  5. Top-down Analysis Review of MMSDs in 42 proposed post-2012 approaches, identified five broad categories: • Targets with flexibility mechanisms - Compatible with CDM in current form 2. Targets with emissions trading only • Fixed and binding targets • Incentives for developing countries participation through large amounts of surplus allowances • Policy and sectoral approaches • Technology approaches • Other

  6. Top-down Analysis 3. Policy and sectoral approaches - Expanded CDM or MMSD that encourages greater participation by including policy or sectoral approaches Technology approaches - No role for an MMSD 5. Other approaches - Carbon tax with some revenue distribution to developing countries; climate Marshall plan • Technology approaches • Other

  7. Bottom-up Analysis CDM: The Narrow Version – a project-by-project approach CDM: The Expanded Version – policy CDM; programmatic CDM; and sectoral crediting mechanisms A Fund-based Mechanism – a fund endowed by Annex I countries that supports SD in developing countries in ways that also achieve mitigation

  8. CDM: The Narrow Version Regime Implications: - Need for a target-based regime that differentiates b/w a group of Parties with targets and one without. If all countries have targets could have a JI-like mechanism. • But CDM has SD requirements and JI does not • Could shift the burden of additionality away from the international level to the national • Could entail a loss to developing countries who would receive development dividend benefits of project investment, but whose targets would be increased by non-additional emission reductions

  9. CDM: The Expanded Version Policy CDM- number of unresolved complexities/ concerns: additionality; double counting; sustainable development; flooding the market for compliance units Programmatic CDM – the current reality; major implication for post-2012 regime relates to scale

  10. CDM: The Expanded Version Sectoral Crediting Mechanisms– potential for large amount of GHG mitigation and SD; but serious limitations: • Baseline determination; additionality; could punish early movers • Transnational – few sectors that would work; coordinating across a number of linked domestic and regional trading systems may not be possible; difficult to reach agreement on international baselines and scope

  11. CDM: The Expanded Version Regime Implications: As with narrow CDM, need for a target-based regime that division between Parties If all countries have targets, could function with a JI-like mechanism. But could be little incentive for JI, if no investor outside of government or project proponent, JI loses advantage over unilateral action – would make more sense to generate credits toward national targets

  12. CDM: The Expanded Version Regime Implications: As CDM becomes more attractive, less incentive for developing countries to take on targets Key difference with narrow CDM is scale – expanded CDM could vastly increase potential for generating credits, perhaps beyond what market will bear Expanded CDM requires ambitious reduction targets that fuel demand for additional credits generated

  13. Fund-based Mechanism Could have scope similar to CDM – project-based or GHG-reducing policies and programs Mandatory contributions from Parties, fund used to purchase credits from projects in developing countries Regime with targets – credits could retire obligations of funders Regime without targets – straight funding mechanism

  14. Fund-based Mechanism Regime Implications: Under a targets regime, similar to status quo; need institution to assess additionality and baseline calculations A no-targets regime would not need to be governed by UNFCCC Negotiations would involve determining what portion (if any) of the fund could be categorized as ODA

  15. Regime Characteristics What sorts of regimes might be conducive to an MMSD in the post-2012 context? Targets • Needed to generate demand for credits • Quantitative targets are easiest • Strength of assigned targets are key to establishing level of demand • A fund could function without targets

  16. Regime Characteristics Differentiation Key to current CDM formulation Implies the issue of “Graduation” from the CDM Countries that take on targets could rely on JI Certain non-Annex I countries are targeted as candidates for graduation Selective graduation may lead to a CDM with a greater development orientation

  17. Regime Characteristics Transition A new MMSD – how to deal with on-going CDM projects or credits that have been banked for future use? Countries that graduate – how to deal with credits from existing projects? e.g., convert CDM projects to JI, provide investors with AAUs equal to CERs, buy out investors

  18. The Development Dividend Sustainable development and the issue of HFC-23 destruction Integration with national development objectives Wider scope for LULUCF projects Graduation of large emitting developing countries

  19. Conclusions Broad consensus on the need for some type of CDM or MMSD in the post-2012 climate regime Need targets for an MMSD, e.g. if pursue technology approaches, need complementary approach with targets Expansion of CDM could lead to high development dividends, but could flood market Graduation – move to JI-like mechanism; possible reduction in supply Could be room for something between hard commitments and no commitments – e.g., crediting for voluntary action

  20. Conclusions Need for fair treatment if rules are changed Need to consider a bridging facility to avoid an investment gap between the first and second commitment period Need for further analysis to understand the implications of the various possible regimes on the shape of an MMSD

  21. Deborah Murphy International Institute for Sustainable Development dmurphy@iisd.ca

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