Climate change necessitates a global transition to a low-carbon, sustainable future. This transition requires substantial climate finance, but maximizing the impact of this finance necessitates consideration of co-benefits—the positive impacts of climate actions beyond greenhouse gas emission reductions. Co-benefits, such as improved air quality, job creation, and enhanced community infrastructure, are often more directly valuable to local communities than carbon emission reductions alone. This approach can broaden stakeholder engagement and incentivize political support for climate action, aligning with the synergies between climate mitigation and various SDGs. Climate finance plays a crucial role in achieving both climate and sustainable development goals. However, the market valuation of co-benefits remains poorly understood. This knowledge gap can lead to policy biases and limit the mobilization of climate finance, particularly private investment, reducing the delivery of real co-benefits to local communities. Previous research on integrating sustainability criteria and co-benefits into sustainable investing has faced challenges in measuring intangible co-benefits, establishing consistent measurement standards, and ensuring comprehensive reporting. While some research has explored co-benefits qualitatively or quantitatively in limited scopes, there is a lack of understanding of how investors value the presence of local co-benefits. This paper addresses this gap by developing a framework to categorize SDGs and local co-benefits, and by applying econometric analysis to the CDM, a historical example of climate finance, to assess how the market values co-benefits.

Existing literature on integrating sustainability into climate finance has explored various aspects of co-benefits. Some studies have employed qualitative methods, using project checklists or detailed profiling to identify co-benefits associated with climate finance projects. Other research has focused on quantitative assessments, using easily measurable indicators, such as environmental or socioeconomic indicators, to evaluate co-benefits. However, these methodologies often lack a comprehensive understanding of interactions between projects and market actors, particularly the market's valuation of local co-benefits. This research builds upon this prior work by focusing on the quantification and market valuation of local co-benefits, bridging the gap between qualitative identification and quantitative assessment.

The authors developed a two-layer framework for categorizing local co-benefits of carbon projects. The first layer identifies five broad categories of local co-benefits (enhanced local infrastructure, access to cleaner and affordable energy, improved income and employment, improved access to electricity/energy-efficient lighting, and improved natural resource and environmental services). The second layer maps these categories to specific SDG targets. A systematic literature review was conducted to assess and score SDG targets and link them to potential CDM co-benefits. This framework was used to group CDM projects into eight levels of co-benefits. Econometric analysis was then performed on a dataset of 2259 CDM projects, examining the relationship between co-benefit levels and CER prices. Four regression specifications were employed to ensure robustness. In addition to analyzing regular CDM projects, the authors analyzed a subset of 64 Gold Standard-certified CDM projects to assess the price premium associated with this certification, which signals higher co-benefits. Propensity score matching, exact matching, and regression adjustment were used to compare CER prices for Gold Standard and regular CDM projects. Further analysis explored heterogeneous effects, examining whether the location of projects or buyers' characteristics influenced co-benefit valuation. Hedonic price models were employed to analyze buyer preferences based on sector and profit status.

The econometric analysis revealed a strong positive correlation between the likelihood of delivering high co-benefits and higher CER prices. Projects with the highest likelihood of delivering co-benefits received a 30.4% higher price than projects with the lowest likelihood. The Gold Standard certification, which signals higher co-benefits, conferred a price premium ranging from 6.6% to 29%. Heterogeneous effects analysis showed that credit buyers in specific sectors (industrial and material, and carbon-related services) showed a higher willingness to pay for projects with higher co-benefits and Gold Standard certification compared to buyers in other sectors or non-profit entities. This suggests that while public funding entities value co-benefits highly, some private sector players demonstrate an even higher value proposition for projects with demonstrably positive co-benefits. Location also played a role; buyers paid higher prices for CERs from Africa compared to other regions. The analysis revealed that the number of projects purchased by a buyer and the buyer’s profit status or sector did not significantly affect the price.

The findings demonstrate that the carbon market values co-benefits, with investors willing to pay a premium for projects delivering substantial co-benefits. This supports the integration of co-benefits into climate finance strategies to enhance their effectiveness and attract more investment. The difference in willingness to pay between public and private entities, and between sectors within the private sector, suggests the need for targeted communication strategies to highlight the value of co-benefits and the financial returns associated with projects delivering substantial co-benefits. The findings suggest that clearly communicating co-benefits alongside carbon benefits can unlock greater private sector investment, potentially leading to more sustainable and impactful climate finance initiatives. The identification of certain regions as having a premium for co-benefits warrants further qualitative research to ascertain the reasons behind this phenomenon. The study’s findings contribute to policy discussions on scaling up climate finance while simultaneously delivering on social and environmental goals.

This paper provides robust evidence that the carbon market values co-benefits, with investors willing to pay more for projects delivering higher co-benefits, especially when verified by certifications like the Gold Standard. This highlights the crucial need for incorporating co-benefits into climate finance strategies to foster broader stakeholder engagement and improve the overall impact of climate action. Future research could explore the generalizability of these findings to other carbon markets and investigate the detailed mechanisms of co-benefit valuation across different buyer types and geographical locations. Furthermore, qualitative studies would enrich the current analysis by exploring the social and community impacts of co-benefits in the projects’ local context.

The study's SDG interaction scores relied on expert judgment and literature review; while transparency was aimed for, alternative methods, such as structured expert elicitation, could improve scoring objectivity. The analysis focused on the CDM, a compliance carbon market; applying the methodology to voluntary carbon markets would enhance generalizability. CDM afforestation/reforestation projects were excluded due to their unique characteristics; future studies could address this.