INTEGRATING SUSTAINABLE DEVELOPMENT GOALS INTO CLIMATE FINANCE PROJECTS: ASSESSING THE MARKET IMPACT OF CO-BENEFITS FROM CARBON OFFSETS

Abstract

By design, climate finance projects have two fundamental features: climate benefits and sustainable development benefits. Climate finance is important for cutting emissions, but it can also deliver significant additional benefits, often termed “co-benefits.” The concept of co-benefits, although lacking a consist definition in the international arena, is so important, especially for the audiences from the developing world. Co-benefits are the backbone of a green and low-carbon development of these developing countries, where promoting high-quality economic development, maintaining economic, financial and energy security, protecting environment and controlling carbon emissions should achieved together. However, how the climate finance market values co-benefits remains poorly understood. By focusing on local co-benefits, this research highlights the importance of valuing co-benefits where projects are located, and how these projects deliver impacts for local communities. This dissertation looks at the question of co-benefits in three specific contexts by using both quantitative and qualitative methods as follows: First, I assess the likelihood that project co-benefits encourage buyers to pay more for Certified Emission Reductions (CERs) within the Clean Development Mechanism (CDM), the major international offset mechanism within a broader world of carbon finance. Second, I look at potential mechanisms of quality branding associated with the CDM to see whether these indicators in fact attract a price premium attributable to co-benefits. Third, I study the role of offset co-benefits in corporate behavior and decision-making in voluntary carbon markets. My research shows that in the CDM context, a project with a likelihood of delivering more co-benefits receives a higher CER price from buyers. The price difference between projects with the highest co-benefits and lowest co-benefits is $4.9/tCO2e on average or a difference of 27.6 percent. The large variability in the price of CER partially comes from the locations of the buyer and the project, while CER prices do not differ based on the buyer’s profit status, sector, or the number of projects they hosted. In the quality branding context, I see that quality control indicators (particularly the independently generated label of “Gold Standard”) have a significant effect on CER prices with the price premium is in the range of $1.13/tCO2e (6.6% of price increase due to the Gold Standard certification of co-benefits) to $4.2/tCO2e (29%). Additionally, I see a strong commitment from public finance in delivering local co-benefits through their willingness to pay a price premium. In the voluntary carbon markets, I find that corporate motivations show a large degree of consistency and orientation, which aligns with the findings on the purchasing behavior for offset standards. Companies with a primary motivation to reduce emissions will prioritize purchasing cost-effective offset projects. Alternately, companies with primary motivations for non-emission impacts (such as company values or market competitiveness) value co-benefits more, and are willing to pay more to fulfill these goals.