Fostering Sustainable Development through Carbon Markets

Tilarupa now uses an electric rice cooker and electric lamps that don’t compromise her family’s health.
Tilarupa now uses an electric rice cooker and electric lamps that don’t compromise her family’s health.

By Virender K. Duggal

The co-benefits of projects supported by the Future Carbon Fund have changed the lives of thousands of people.

The Future Carbon Fund (FCF), a trust fund managed by ADB, provides carbon finance to projects that reduce greenhouse gas (GHG) emissions.

What is less well known is that these projects also deliver social, environmental, and economic co-benefits that contribute to sustainable development in the Asia Pacific.

Before 2010, Tilarupa, from Baleygang, a remote village in Bhutan, had a difficult life. She used a kerosene lamp for lighting and firewood for cooking on a traditional cook stove, causing a lot of smoke and poor air quality inside her house.

Her life changed when construction began that year on the ADB-funded 126-megawatt Dagachhu Hydropower Project. With access to stable, unrestricted electricity, she now uses an electric rice cooker and electric lamps that don’t compromise her family’s health.

Tilarupa says the time she used to spend collecting firewood  is now for taking care of her family. She is just one of thousands of people whose lives have been changed due to the co-benefits of projects supported by the FCF.

What are these co-benefits?

We examined the social, environmental, and economic co-benefits of FCF-supported projects and mapped these against the 17 Sustainable Development Goals (SDGs) in the recently published report Future Carbon Fund Delivering Co-Benefits for Sustainable Development.

We found strong linkages between investments in climate change mitigation projects and the delivery of co-benefits. FCF-supported projects not only reduce 2.95 million tons of carbon dioxide equivalent per year (SDG 13 on climate action) but also benefit more than 10.5 million people by delivering a broad set of co-benefits.

These co-benefits include improved energy access and energy security, job creation, diffusion of low-carbon technologies, technological innovation, better health from reduced air pollution, reduced use of imported fuels, lower traffic congestion, and growing net trade of technologies and services.

Operational since 2009, the FCF supports Clean Development Mechanism (CDM) projects through the pre-purchase of Certified Emission Reductions (CERs or carbon credits) from 2013 to 2020. CDM projects like Dagachhu generate CERs corresponding to their actual emission reductions, which can then be traded internationally to generate carbon finance.

FCF’s ability to pay upfront in combination with payment on delivery of CERs helps project entities to meet project development and implementation costs. The trust fund’s assurance of a fixed price provides certainty and limits the downside for project entities, thus encouraging successful mitigation outcomes as well as additional co-benefits.

Our assessment determined that CDM projects can indeed deliver a wide range of co-benefits, and that project design is crucial. Integrating co-benefits in the project design, technology selection, and stakeholder consultations strengthens the complementary relationship between mitigation and sustainable development.

It is also clear that several stakeholder groups can influence the delivery of co-benefits.

Project entities play a critical role through the design and implementation of their projects. National and local governments also have an important role by setting a strategic direction and creating enabling policy frameworks and guidelines for effective implementation.

The carbon credit buyer, in this case the FCF, can include the assessment of co-benefits as part of their CER transactions, and structure their purchase agreements to provide results-based carbon finance linked to certain development activities and/or delivery of co-benefits. This can motivate stronger inclusion of co-benefits in mitigation projects.

Another compelling finding is that it is possible to link co-benefits from mitigation projects to the SDGs. To do so, however, we must be able to quantify these co-benefits using a robust methodology to demonstrate the correlation between investments to mitigate climate change and sustainable development co-benefits.

The best way to do this would be through a universal standard for the monitoring and reporting of co-benefits. This would enable us to clearly demonstrate the contribution of mitigation projects to the broader objective of sustainable development.

On this front, there is reason for optimism: the Paris Agreement on climate change acknowledges the intrinsic relationship between sustainable development and climate change actions, and has a greater emphasis on sustainable development compared to the Kyoto Protocol.

The Paris Agreement has re-ignited interest in market mechanisms and raised expectations for the resurgence of carbon markets.

Article 6 provides market mechanisms with a renewed basis for support, allowing countries to cooperate in achieving their national commitments. Article 6.4 defines a new international carbon offset mechanism by which public and private entities can support GHG emission reductions and sustainable development

This new mechanism, to be discussed and agreed among parties (nations) may therefore require mitigation projects to demonstrate that they also contribute to sustainable development through the delivery of co-benefits. A stronger emphasis on monitoring and reporting of co-benefits, ideally using the SDG framework, will facilitate “fostering sustainable development” as envisaged under Article 6.4.

That way, the benefits of emissions reduction regimes will extend much deeper and have a far greater impact on the lives of Tilarupa, and many others like her.