Policy-makers and scientists have raised concerns about the functioning of the Clean Development Mechanism (CDM), in particular regarding its low contribution to sustainable development, unbalanced regional and sectoral distribution of projects, and its limited contribution to global emission reductions. Differentiation between countries or project types has been proposed as a possible way forward to address these problems. An overview is provided of the different ways in which CDM differentiation could be implemented. The implications for the actors involved in the CDM are analysed, along with a quantitative assessment of the impacts on the carbon market, using bottom-up marginal abatement cost curves. The discounting of CDM credits, quota systems, or differentiated eligibility of countries could help to address several of the concerns raised. Preferential treatment may also make a limited contribution to achieving the aims of CDM differentiation by increasing opportunities for under-represented host countries. The impact on the carbon market appears to be limited for most options.