This paper looks at both the back ground of the Clean Development Mechanism (CDM), and discusses to what extent its current design allows it to achieve both its objectives as defined in the Kyoto Protocol: to promote sustainable development in host developing countries, and to improve global cost-effectiveness by assisting developed countries in meeting their Kyoto targets.The first part of the paper draws on existing literature to discuss:the flexibility mechanisms under the Kyoto Protocol the CDM’s market potential the issues of cost-effectiveness and sustainable development The second part of the paper asks to what extent there is a conflict between cost-effectiveness and sustainability, and whether the two objectives of the CDM can be achieved simultaneously. For this, two potential CDM-projects (energy efficiency and fuel switching in Brazil and China) are assessed and a set of indicators developed to evaluate non-carbon benefits of CDM projects on the environment, development, and equity.Findings of the paper include: to fulfil the dual objective of the CDM, projects must improve cost-effectiveness and promote sustainable development. There are numerous challenges related to securing real and measurable emissions reductions and at the same time keeping transaction costs lowCDM projects can have significant impacts on environment, development, and equitySome of the energy options in the Brazilian case were found to have negative impacts on the environment, whereas the impacts on development and equity are predominantly positive (or neutral)in the Chinese case, most energy projects have neutral environmental impactsthe 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 forCDM projects have the potential to be an important channel for exporting efficient, green technologies to developing countries, which may be the most efficient way of reducing global climate changethe proposed set of indicators can be a necessary tool to assure that sustainability impacts of CDM projects are taken into consideration[Author]