12.3.5 Implications of climate policies for sustainable development

A major policy development since the TAR is the implementation of a large range of climate policies at the international level (e.g., Kyoto Protocol), regional level (e.g., EU Emissions Trading Scheme), national and sub-national level (see the review in Section 13.3.3.4).

The implications of these policies for sustainable development are not assessed in the literature, except for those of the Clean Development Mechanism (CDM) (Michaelowa, 2003; Spalding-Fecher and Simmonds, 2005; Sutter, 2003; UNEP, 2004; Winkler, 2004; Winkler and Thorne, 2002). For extensive discussion, see Section 13.3.3.4.2. The sustainable development implications of particular mitigation activities that can be implemented under the CDM are discussed further in Section 12.3. This section focuses on the sustainable development implications of CDM as a policy. Key findings from this literature that relate to the implications of climate policies on sustainable development are as follows:

• The CDM channels non-trivial amounts of money towards developing countries. In 2005, the CDM channelled about US$2.5 billion to purchase carbon credits in developing countries (Capoor and Ambrosi, 2006), or 0.75% of the (record) net foreign direct investment (FDI) inflow in developing countries for that year (UNCTAD, 2006). In addition, it can be argued that the CDM leverages new private capital to developing countries.
• Since carbon payments are payable in strong currencies, and usually originate from buyers with strong credit ratings, they provide the seller with additional opportunities to raise additional capital and debt from banks and other finance institutions (Mathy et al., 2001; Lecocq and Capoor, 2005).
• The geographical distribution of CDM projects tends to follow FDI flows with most of the financial flows towards large middle-income countries (Fenhann, 2006), and very little financial flows towards least developed countries, notably in Sub-Saharan Africa (Capoor and Ambrosi, 2006).
• Projects mitigating non-CO₂ gases (HFC23, N₂O and CH₄) represent the bulk of the volume of emission reductions exchanged under the CDM. However, projects with the highest direct benefits for local communities deliver fewer emission reductions and are in general accompanied by higher transaction costs. Resolving the tension between global emission reductions and local benefits is a key challenge for the future of climate change regime (Ellisa et al., 2007).