Market Mechanisms for Sustainable Development in a Post-2012 Climate Regime: Implications for the Development Dividend

The paper examines four regime options for a post-2012 climate framework: maintaining targets with flexibility mechanisms (broadening the CDM scope), differentiating developing country eligibility, implementing an expanded CDM (sectoral/NAMA approaches), and establishing a fund-based mechanism. It analyzes how these options affect the 'development dividend' across three dimensions: quality (sustainable development benefits), quantity (volume of Certified Emission Reductions), and regional distribution (investment in least developed countries). The authors conclude that while a fund-based mechanism best addresses quality and equity, it may struggle to match the investment volumes of private-sector market mechanisms. Conversely, expanding the CDM scope could flood the market with cheap credits, potentially crashing prices unless accompanied by ambitious emission reduction targets in developed nations.

• Broadening the scope of the Clean Development Mechanism (CDM) to include land use, land-use change and forestry (LULUCF) could significantly increase the supply of low-cost credits, potentially leading to market over-supply. For instance, research suggests 94 percent of Amazon deforestation could be avoided at less than US$5 per tonne, well below the then-trading range of US$25-35 per tonne.
• A regime featuring the 'graduation' of advanced developing countries to target-based commitments would likely reduce the overall volume of Certified Emission Reductions (CERs). If China were removed from the market, the CDM pipeline would decrease by 36 percent and the volume of CERs by 2012 would drop by 54 percent.
• Expanding the CDM to include sectoral crediting and Nationally Appropriate Mitigation Actions (NAMA) could deliver GHG reductions at a much higher magnitude than the current project-based approach, but risks crashing the market if demand from developed countries does not increase proportionally.
• A fund-based mechanism is identified as the most effective tool for ensuring equitable regional distribution and high-quality sustainable development, as it can explicitly direct funds to least developed countries (LDCs) and specific priorities.
• There is a significant gap between the investment capacity of government-supported funds and the private sector investment driven by the CDM. For comparison, the Global Environment Facility's mitigation-related disbursements averaged about US$250 million per year, while CDM-registered projects in 2006 attracted an estimated US$7 billion.
• The regional distribution of CDM projects is highly unequal, with Latin America, the Caribbean, Asia, and the Pacific accounting for over 95 percent of projects and CERs, while LDCs represent less than 1 percent of both.

APA

Murphy, D., Cosbey, A., & Drexhage, J. (n.d.). Market Mechanisms for Sustainable Development in a Post-2012 Climate Regime: Implications for the Development Dividend. International Institute for Sustainable Development. https://www.iisd.org/system/files/publications/implications_dev_dividend.pdf

Chicago

Murphy, Deborah, Aaron Cosbey, and John Drexhage. Market Mechanisms for Sustainable Development in a Post-2012 Climate Regime: Implications for the Development Dividend. International Institute for Sustainable Development, n.d. https://www.iisd.org/system/files/publications/implications_dev_dividend.pdf.

Wikipedia

{{cite report |last1=Murphy |first1=Deborah |last2=Cosbey |first2=Aaron |last3=Drexhage |first3=John |title=Market Mechanisms for Sustainable Development in a Post-2012 Climate Regime: Implications for the Development Dividend |publisher=International Institute for Sustainable Development |url=https://www.iisd.org/system/files/publications/implications_dev_dividend.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{murphyndmarket, author = {Murphy, Deborah and Cosbey, Aaron and Drexhage, John}, title = {{Market Mechanisms for Sustainable Development in a Post-2012 Climate Regime: Implications for the Development Dividend}}, institution = {International Institute for Sustainable Development}, url = {https://www.iisd.org/system/files/publications/implications_dev_dividend.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }