Can the Clean Development Mechanism attain both cost-effectiveness and sustainable development objectives?
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- CICERO Working Papers 
The Clean Development Mechanism (CDM), as defined in the Kyoto Protocol, has two objectives: to promote sustainable development in host developing countries, and to improve global cost-effectiveness by assisting developed countries in meeting their Kyoto targets. The aim of this paper is to explore the background of the CDM and discuss to what extent its current design allows it to achieve its dual objective. The first part of the paper is a literature review that includes descriptions of the flexibility mechanisms under the Kyoto Protocol, the CDM’s market potential, and the issues of cost-effectiveness and sustainable development. In the second part of the paper, we discuss to what extent there is a conflict between cost-effectiveness and sustainability, and whether the two objectives of the CDM can be achieved simultaneously. We develop a set of indicators to evaluate non-carbon benefits of CDM projects on the environment, development, and equity, and show how these indicators can be used in practice by looking at case studies of CDM project candidates in the energy sector from Brazil and China. We demonstrate that for some CDM projects there is a trade-off between cost-effectiveness, in terms of a low quota price, and a high score on sustainability indicators. We have reason to believe that the size of the CDM market in some studies is over-estimated since transaction costs and the challenge of promoting sustainable development are not fully accounted for. Also, we find that the proposed set of indicators can be a necessary tool to assure that sustainability impacts of CDM projects are taken into consideration.