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Varieties of Carbon Governance in Newly Industrializing Countries Harald Fuhr and Markus Lederer The Journal of Environment Development 2009; 18; 327 DOI: 10.1177/1070496509347079 The online version of this article can be found at: http://jed.sagepub.com/cgi/content/abstract/18/4/327

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Varieties of Carbon Governance in Newly Industrializing Countries

The Journal of Environment & Development 18(4) 327–345 © SAGE Publications 2009 Reprints and permission: http://www. sagepub.com/journalsPermissions.nav DOI: 10.1177/1070496509347079 http://jed.sagepub.com

Harald Fuhr1 and Markus Lederer1

Abstract Recently established carbon governance systems are quite different in Brazil, China, and India. Such divergence is surprising as emerging economies are primarily involved in carbon governance through the clean development mechanism (CDM). One would expect similar institutional and policy outcomes in the major host countries in response to the CDM, as this market instrument is initiated primarily by Western companies and regulated hierarchically by the internationally governed CDM Executive Board. However, from a closer look at the developing features of the CDM markets in Brazil, China, or India and an analysis of dominant actors and their interactions, institutional responses, and the effectiveness of the CDM within each market, there is evidence of a high variance, combined with a strong ownership by the respective governments. Such a variety of carbon governance is interesting from a theoretical point of view as it shows that a good understanding of environmental governance patterns is still lacking in developing and emerging economies. It is also of political importance as the findings may help to diffuse some of the criticism leveled at the CDM. Keywords CDM, carbon governance, China, India, Brazil

Introduction Climate change is a global problem, but the implementation of solutions to the climate crisis and the way in which “carbon issues” are dealt with is very often being done at national and local levels. This is not only true for adaptation, where we would expect

1

University of Potsdam, Germany

Corresponding Author: Harald Fuhr and Markus Lederer, University of Potsdam, DFG Research Center 700, Karl-Marx-Straße 67, 14482 Potsdam, Germany Email: [email protected]


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The Journal of Environment & Development 18(4)

this, but also for mitigation, where many would argue that only the global level is of importance. In this special issue, we will analyze the institutional settings currently emerging in newly industrializing countries. We will present case studies of carbon governance from Brazil, China, and India, since these three countries have recently contributed to some of the most important greenhouse gas (GHG) reductions through one particular instrument of carbon governance: the clean development mechanism (CDM). In particular, we are asking whether we see convergence or divergence in regard to carbon governance in Brazil, China, and India. This question is important for both theoretical and practical reasons. Theoretically, so far most scholarly work using the concept of governance has either focused on member countries of the Organisation for Economic Co-operation and Development (OECD)—where the monopoly on the legitimate use of force, the rule of law, and a more or less effective implementation of public policies can be regarded as given—or such OECD features are taken as reference points. Nevertheless, there is a high variance among actors who participate in agenda setting, in policy formulation, and in the implementation and monitoring of political decisions (for a good overview of the debate, see Benz, 2004; Schuppert, 2007). One interesting result of the literature that currently deals with such variations in governance in the OECD is that—despite all reconfigurations of the state and “governance by, with and without government”—it is the government that keeps the ultimate political responsibility (Genschel & Zangl, 2007; Leibfried & Zürn, 2006). Although this may, in principle, also hold true for the role governments are playing in the developing world, the state may not be able to fulfill this responsibility in many countries where state institutions are weak. Consequently, such shortcomings would need to be taken into account when carbon governance systems in such settings are analyzed. This debate is also of importance for practical reasons since there is a lot of criticism in using the CDM as an expanded mechanism for the inclusion of the developing world into a post-2012 climate regime. The CDM is often regarded as working just as an offsetting mechanism, which does not contribute to overall emission reductions (Schneider, 2007). Some authors argue that the mechanism diverts attention from domestic reductions in Annex I countries as well as in the South (Luhmann & Sterk, 2008) and that it is has failed so far to initiate carbon reductions in some sectors (in particular the forestry sector) and some regions (sub-Saharan Africa, for example, is completely marginalized in the carbon market). At the local level, various projects have been criticized for their poor or negative environmental impact (International Rivers Network [IRN], 2008; Michaelowa & Purohit, 2007) or for generating high windfall profits. Moreover, most observers agree that one of the key objectives of the CDM— initiating best practices of sustainable development—has not (yet) been achieved. Summarizing such criticism, Wara and Victor (2008) argued that the CDM “rather than draw them [the developing countries] into substantial limits on emissions it has, by contrast, rewarded them for avoiding exactly those commitments” (p. 6). Given such statements, negotiators may often wonder whether the CDM was such a good idea in the first place, and whether it should be abandoned in a post-2012 agreement.


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In the following, we will argue that such conclusion is premature, as it underestimates the CDM’s dynamics and its broader effects in the larger host countries. Furthermore, many of the problems mentioned appear to be related to a lack of management as the CDM at all levels is often implemented neither transparently nor professionally (Streck, 2007). The CDM also appears often to generate wrong incentives for private companies mandated to validate and ultimately certify individual projects (Schneider, 2007). To address such concerns and to adjust and reform the CDM effectively, we still need a better understanding of local governance issues and the institutional responses triggered by the CDM, especially in those countries where most projects have actually been setup. In this article, which is based on our findings from empirical research in Brazil, China, and India, we will try to fill these gaps. We will show that the CDM has been managed quite differently in these three cases. At the same time, we recognize some evolving patterns, which help us to explain how the CDM has been integrated successfully into national environmental policies. This is, to some extent, surprising as one would expect that an internationally initiated and top-down regulated market mechanism, such as the CDM, would leave little room for national policy makers to influence implementation. One would expect convergence rather than divergence in practices of implementation. We do, however, see the contrary. To explore these arguments, we will, in a first step, briefly refer to the debate on governance and highlight some related concepts and how they may be usefully applied to analyzing CDM operations. We will then discuss the inclusion of market instruments as one particular governance mechanism and eventually turn to operational aspects of the CDM as a project-based market mechanism, which links developed and developing countries in the climate protection regime. Next, we will present some of the findings and interpretations from our case studies, and explain what we mean when we talk about “varieties of carbon governance.” A short conclusion will summarize the results and provide some ideas for further research.

Governance and the Use of Market Instruments Governance refers to institutionalized modes of coordinating societal activities toward collectively binding rules and/or the provision of collective goods for a defined group of people (Risse & Lehmkuhl, 2007). Our understanding of governance presupposes that participating actors intend to bring about such rules or goods for a specific collectivity (Ladwig, Jugov, & Schmelzle, 2007). Contrary to the broader definition of governance by Williamson (1975), we argue that the market itself is not a governance structure. The famous baker of Adam Smith, who bakes bread out of self-interest and thereby contributes to food security, would not, therefore, perform a governance function. As recent events in the financial system indicate, every economic activity is embedded in a broader societal order (Granovetter, 1985; Polanyi, 1944/1957) and can only be carried out within a clearly defined regulatory framework. The setting up of such regulation is an act of governance, whereas the anonymous coordination of demand


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and supply that constitute market mechanisms is not. Therefore, our understanding of governance should not be read as being a synonym to deregulation or a normative call for a retreat of the state. On the contrary, we argue that markets are unlikely to work without a priori governance (see also the recent summary in Dixit, 2009). For quite some time, economic governance has been neglected by economists. Since the mid-1990s, however, advocates of new public management (NPM) have stressed that market instruments could serve as quite an effective form of “steering” in public policy. Others have been rather skeptical about whether—and to what extent— NPM and market mechanisms could really be employed in the daily practice of public administration and even more so in the developing world where public institutions are often poorly developed and informality is high (Schick, 1998). Markets have also been in the focus of environmental governance (for a rather critical overview, see P. Newell, 2005), although countries with a more state-centric tradition, such as Germany, have initially been quite reluctant to introduce them in environmental practice (Jordan, Wurzel, & Zito, 2007; Wurzel, Jordan, Zito, & Brückner, 2003). In environmental protection, there are two options for markets to play a role in governance. On one hand, markets can be properly regulated so as to ensure that production, exchange, or consumption of goods is done more sustainably. This can be achieved either through (a) traditional regulatory measures, (b) cooperation between public and private entities (i.e., public–private partnerships [PPP]), (c) self-regulation of industries, (d) voluntary standards, and (e) certification systems. The latter have been labeled “non-state market driven” governance systems by Cashore and Bernstein (Cashore, 2002; Cashore & Bernstein, 2007). Such private governance rests on the assumption that private actors are not only more efficient than public ones but are also authoritative and thus legitimate regulatory actors (Cutler, Haufler, & Porter, 1999). Examples include the Forest Stewardship Council (Boström & Klintman, 2008; Pattberg, 2005, 2007), the Fairtrade Labelling Organization, the Sustainable Tourism Stewardship Council, or current attempts to certify the production of bioethanol (Delzeit, Bohle, & Holm-Müller, 2007; Friberg, 2008). On the other hand, markets are being set up directly as an instrument for different environmental issues (for an overview, see Larson, Ambrosi, Dinar, Rahman, & Entler, 2008). They have, for example, successfully been employed in sustainable fishery (Anderson & Sutinen, 2006; R. G. Newell, Sanchirico, & Kerr, 2005). Markets are also perceived as particularly important to reduce GHG emissions efficiently and effectively (Eliasch, 2008; Stern, 2007). Contrary to the simple “greening” of market behavior, market mechanisms now put a price tag on emissions and internalize costs, which otherwise would have to be borne by the public and the environment. The original concept for setting up tradable permits as an alternative to top-down regulation was introduced by Ronald Coase (1960) and was further developed by the Canadian economist John H. Dales (1968). In practice, governance systems that use market instruments for the purpose of reducing and trading emissions (i.e., emission trading systems [ETS]) have been known since the early 1970s (for a good overview of the different systems, see


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Schreurs, 2008b). In 1976, the U.S. Environmental Protection Agency introduced the first “offset mechanism,” which allowed the building of new factories under the condition that they provided air pollution reductions in another facility of the same company in the same region. In 1990, the U.S. Acid Rain Program was initiated by the U.S. Clean Air Act to curb sulfur dioxide emissions. Its effect was that “emissions trading left its protected space and stepped out into the wider world of environmental politics” (Voß, 2007, p. 9). Finally, in the 1990s, the use of market instruments moved into the mainstream of climate politics as private actors like Shell or BP—supported by lobby groups like the International Emission Trading Association—and individual countries, such as the United Kingdom and Denmark, set up prototypes of carbon dioxide trading. At the international level, it was the Montreal Protocol that made use of emission trading for the first time to reduce ozone depleting substances. One of the ironies of the Kyoto process is that the United States favored emission trading initially, whereas the EU was skeptical. Now it is the EU that has ended up championing market instruments through its own emission trading scheme (EU ETS), eventually covering some 11,500 facilities (in 2005) with a total of 6.5 gigatonne of CO2 emissions per year (EU Commission, 2005; Skjaerseth & Wettestad, 2008). Other regional or national trading systems are already operating or are being launched in New Zealand, Australia, Switzerland, Canada, and Japan on a national scale, whereas the Regional Greenhouse Gas Initiative (California), the Midwestern Greenhouse Gas Accord, or the Western Climate Initiative all work at subnational level, awaiting a more favorable federal administration in the US (Flachsland, Marschinski, & Edenhofer, 2008; Schreurs, 2008a). The developing world is linked to these markets as the EU ETS and the Kyoto Protocol’s cap-and-trade systems allow the use of offsets, which encourage emission reductions in transition countries through joint implementation projects or in developing countries through CDM projects. The CDM, however, is not only much more important quantitatively, it is also critical for connecting carbon markets in the developed and the developing world.

Carbon Governance and the CDM The CDM has two objectives. First, it is an offset mechanism permitting industrialized countries to credit emission reductions on their Kyoto-Protocol obligations from GHG abatement projects in developing countries. As long as GHG emissions are cheaper in the developing, non-Annex I countries, it is possible to lower the cost of Kyoto compliance. Second, the CDM should support sustainable development practices in the host countries. The CDM is thus the entry point for developing countries to participate in the burgeoning carbon markets, and today it is the main mechanism for financial transfers for climate protection between the North and the South.1 The CDM has shown to be a rather flexible mechanism that fulfils its objective of providing cost-efficient emission reductions (Benecke, Friberg, Lederer, & Schröder, 2008). It has also been hailed a great success by policy makers as “the CDM is delivering what it was meant to deliver—emission reductions and development. What’s


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more, it has shown that it can evolve, adapt and improve.” (Yvo de Boer, Executive Secretary of the United Nations Framework Convention on Climate Change [UNFCCC]; UNFCCC, 2007). Linking the CDM to the EU ETS, a cap-and-trade system, was not foreseen when the mechanism was designed, but it has increased the general liquidity and demand for carbon credits in the market. Furthermore, the CDM has initiated environmental technology transfers (for a good overview, see Benecke, 2009; Dechezlepetre, Yann, & Yann, 2008; Larson et al., 2008). As our case studies will show in more detail, the latter has essentially been achieved through capacity development, such as skills development and administrative strengthening. The introduction of the CDM has also led to an increase in knowledge about the carbon market in general and GHG accounting in particular. Also, a general awareness about climate change issues has been initiated. Finally, a substantial transfer of finance has taken place toward emerging economies. For example, in Brazil, revenues from certified emission reductions (CERs) are reaching Rank 20 in terms of external (“export”) revenues. The CDM thus apparently constitutes a rather successful “new mode of governance” that developed from a PPP into a burgeoning market (Fuhr, Lederer, & Schröder, 2007). This has not happened in a uniform manner but rather on different trajectories. Given the CDM’s overall development, one would expect more convergence than divergence in implementation,2 for four reasons. First, market instruments and processes of diffusion usually lead to convergence as similar problems result in similar policy responses (Jänicke & Klaus, 2006; Knill, 2005; Simmons & Elkins, 2004). Hence, at least in the OECD, there is an overall trend toward convergence in environmental policy making (Busch & Jörgens, 2007). Second, governance arrangements sustaining the CDM are multilevel and most strongly influenced by international actors. This holds for both the Conference of the Parties (COP), which is still its highest authority, and the CDM Executive Board (EB) whose members are appointed by the COP (Benecke, 2008). International regulation thus largely determines the institutional structures in which CDM projects can be developed, verified, and registered. Given such procedures, we should witness a top-down approach that leads to similar patterns in host countries and constrains national modifications. Third, as a market mechanism, the CDM relies heavily on market actors as “change agents” (for a good description of change agents, see Rogers, 2003; Stone, 2004). Initially, these actors were Western consulting companies, project developers, project validators, or development agencies, who all acted as innovators at the local level. One example is Ecosecurities, a company that has been one of the most important project developers in all emerging carbon markets. Another is Det Norske Veritas (DNV), a global certification company that, together with some others, dominates the niche market for validation and verification of CDM projects as designated operational entity (DOE). Again, the involvement of such actors would suggest harmonized practices and emulation in host countries. Fourth, the CDM does not require redistributive practices. On the contrary, the CDM transfers resources from the developed to the developing world and therefore does not face much opposition, neither at national nor at subnational levels. Consequently, we should expect rather similar patterns of development across countries.


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However, contrary to such expectations, there is a rather surprising variety of carbon governance arrangements in Brazil, China, and India. In fact, divergence is visible at the level of policy outcomes and at the level of government programs, indicating a strong case of nonconvergence (Holzinger & Knill, 2005). This can be shown by focusing on (a) the features of emerging CDM markets, (b) the role individual actors play and how they interact, and (c) the CDM’s effectiveness.

Features of Emerging CDM Markets Brazil, China, and India cover the three largest CDM markets in the world, both in terms of the number of projects and the amount of CERs generated. Brazil’s government first introduced the idea of a clean development fund in the Kyoto negotiations and participated early on in the CDM’s predecessor, the activities implemented jointly. Today, Brazil is the third largest CDM host country but, due to its clean energy matrix, more than 77% of Brazil’s electricity is generated through hydropower. The Brazilian Designated National Authority (DNA) has a reputation for upholding the environmental integrity of the CDM system and does not focus on promoting the CDM. Even if the CDM has so far been too marginal to significantly influence overall energy policy, one sector where the CDM has played an important role is the sugarcane industry. In this sector, CDM projects have helped introduce bagasse cogeneration technology, and the sale of surplus electricity is now seen as a third revenue stream—in addition to the traditional products of sugar and ethanol. Not surprisingly, there are sharp regional disparities in the set up of CDM projects (see Figure 1). Chinese government officials first appeared reluctant to enter the CDM market, but subsequently the country became a world leader. China now accounts for 39.3% of all CDM projects registered (or in the pipeline) and 55.5% of all CERs generated (United Nations Environment Programme [UNEP], 2009). The country appears to attract investors and CER buyers with favorable conditions for foreign investors and good public management. Interestingly, carbon governance in China follows the traditional top-down approach with command-and-control regulations and a governmental check on foreign companies. The Chinese CDM market is characterized by hard steering and an overall “state capture of the market” as the Chinese government is very apt in utilizing the international market mechanisms for its own political priorities (see Figure 2). India has the second largest CDM market. The UNFCCC CDM pipeline lists 1,127 projects at various stages of CDM registration, accounting for 25.2% of all CDM projects worldwide (UNEP, 2009). CDM projects generate revenues totaling 423,788 kCERs in 2012, which is 15.3% of the global CDM market. A prominent feature of the CDM in India is its “sweatshop” character. It has led to an exponential increase in CDM project application and a “Project Development Document (PDD) assembly line production.” However, in comparison with China, most projects are small scale and generate little revenue. There are some interesting features of the Indian CDM market. First, the majority of CDM projects concentrate on renewable energy. Second, nowhere else are more CDM projects rejected than in India, and many of the CDM projects currently set


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14

100 90

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GDP/CAP R$

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10 0

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Rio de Janeiro

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Amazonas

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Rondônia

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Tocantins

Acre

Bahia

Rio Grande do Norte

Pernambuco

Pará

Ceará

Paraíba

Alagoas

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Piauí

Number of CDM Projects

GDP/cap

Figure 1. Number of CDM projects and GDP/capita in Brazilian states (1000 R$)

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200 180 160 140 120 100 80 60 40 20 0

60000 Yuan/cap

50000 40000 30000 20000 10000 Guizhou Gansu Yunnan Anhui Guangxi Sichuan Jiangxi Qinghai Ningxia Hunan Shaanxi Chongqing Hainan Hubei Henan Shanxi Xinjiang Jilin Heilongjiang Hebei Inner Fujian Liaoning Shandong Guangdong Jiangsu Zhejiang Tianjin Beijing Shanghai

0

Million projects/cap

Note: CDM = clean development mechanism. Source: Assembled from United Nations Environment Programme (2009) Risoe Centre CDM Pipeline and Brazilian Institute of Applied Economic Research (IPEA) statistics.

Total number of projects

Yuan/cap

Figure 2. Total number of projects versus GDP/capita in Chinese provinces Source: United Nations Environment Programme (2009).

up have questionable additionality, particularly in wind energy. Third, only a third of all CDM projects are characterized as bilateral, that is, have signed letters of approval with participants from developed countries. The fact that most of the Indian CDM projects are


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200 180 160 140 120 100 80 60 40 20 0

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60000 50000 40000 30000 20000 10000 Bihar Uttar Pradesh Orissa Jharkhand Madhya Pradesh Assam Chhattisgarh Rajasthan Manipur Jammu and Kashmir Uttarakhand Meghalaya Arunachal Pradesh West Bengal Tripura Andhra Pradesh Karnataka Sikkim Nagaland Tamil Nadu Mizoram Gujarat Kerala Himachal Pradesh Punjab Haryana Maharashtra Delhi Goa

0

Number of projects

Fuhr and Lederer

Total number of projects

Rupees/cap

Figure 3. Total number of projects versus GDP/capita in Indian states Source: United Nations Environment Programme (2009).

unilateral (with no involvement of Western companies) is subject to critical debates related to issues of foregone technology transfer and foreign investment. One recurrent feature in all three CDM markets is that CDM projects cluster in the richer parts of each country (Figure 3). This does not come as a surprise as most emissions are produced in areas where most industries are located and where the best institutional infrastructure exists. Overall, the three biggest CDM markets share some features (e.g., regional disparity), but otherwise major differences remain (see summary in Table 1).

Actors and Their Interactions Various actors and groups of actors participate in the CDM project cycle. They include project developers, financial institutions, national bureaucracies (in particular the DNAs and the DOEs, which verify and validate projects), and the international authorities (EB). Project developers and DOEs behave rather similarly in our three country cases. This may be due to the fact that DOEs are almost exclusively Western-based companies. This might change in the future, since (supported by Western donors) some Chinese certification companies have recently applied to become accepted as DOEs by the Executive Board. However, given the widespread concerns in the market whether they will apply the same rigorous standards, there is some reluctance to grant them accreditation offhand. Also project developers are either Western companies or


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Table 1. Comparison of Registered CDM Projects in Brazil, China, and India

% share of Volume of No. of worldwide total CERs up to projects projects 2012

% share of worldwide total CER generation

Brazil

159

9

131,032

8

China

579

34

885,215

54

India

438

26

231,635

14

Three most common Three most project common types worldproject types wide Methane 1. Hydro avoidance, power hydropower, landfill gas Hydropower, 2. Biomass wind power, energy energy efficiency Wind power, 3. Methane energy avoidance efficiency, hydropower

Note: CDM = clean development mechanism; CER = certified emission reduction. Source: United Nations Environment Programme (2009)

still strongly rely on international consultancies like Ecosecurities. Within this group of actors, we did not find substantial differences among countries in terms of management practices, but there is no clear cut convergence either. Nongovernmental organizations (NGOs) did not play a significant role in the CDM discourse in any of our countries. This is possibly the most surprising element of our findings, as one would have expected a highly contentious market mechanism like the CDM to face serious opposition from NGOs in India or Brazil. In the case of Brazil, where we assumed the participation of a lively environmental NGO community, such as the one engaged in the protection of the Amazon rain forest, we found little action toward the CDM. Those NGOs working on climate change issues focused on deforestation and on the ongoing negotiations for a new international climate agreement. In China, however, with its restrictions to public participation in decision making, we recognized activities by NGOs. NGOs were essentially engaged in campaigns to raise awareness on climate change, but they abstained from critical comments on CDM projects (Schröder, 2008). A position paper on the CDM by 40 Chinese NGOs, which had been drafted with international NGOs and presented at COP/MOP (Meeting of Parties) 13, was basically in line with the Chinese government’s position. In India, civil society actors did not engage much in advocacy or lobbying activities related to the CDM, although many CDM projects are implemented in rural areas where Indian development agencies have a strong presence. If civil society did engage at all in CDM projects, it took place at the federal level. Indian NGOs seem to be more interested in directly participating in the CDM and promoting activities in niche markets,


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Fuhr and Lederer Table 2. Different Roles of CDM Market Actors in Brazil, China, and India Brazil

China

India

Government

Holds up “environmental integrity” in project development

Project developers/ consultancies

Heavy competition, but informal cooperation among biggest consultancies Financial community Banks have no Slowly emerging has large interest in interest in trading, awareness among developing carbon hardly an interest national banks market and trading, in project financing but so far with limited success Awareness, but limited Awareness, positive Engagement in project engagement in CDM position, no activities but no capacity watchdog Strong involvement Involvement of Mostly among from key scientists scientists in development in methodology CDM capacity assistance development and development community + cooperation with and project business community DNA development

Buyers/traders

Civil society Epistemic communities

Keeps control of Has facilitating role market and foreign for CDM market actors, and also development provides capacity development International and Many unilateral domestic project projects developed developers by Indian companies

Note: CDM = clean development mechanism; DNA = Designated National Authority.

such as rural electrification. They appeared as partners in CDM development rather than critical watchdogs. More important than critical civil society groups are national epistemic communities. In Brazil and China, universities and research institutes play an important role in the developing carbon markets. In Brazil, various universities even offer CDM project development courses. In India, by contrast, national epistemic communities working on the CDM hardly exist in academia but rather in the business community, for example, in chambers of commerce or in the development assistance community. The most important differences among participating actors, however, can be found within the public sector, in particular regarding the DNAs. In Brazil, we witnessed how the DNA’s initial focus on strong environmental integrity in the CDM was challenged when business interests exerted political pressure for a preferred method of calculating the carbon baseline in the electricity grid. The Chinese government had very clear objectives regarding the CDM. First, it sought to participate in the market


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to gain a substantial amount of market share. Furthermore, foreign investment and the potential of technology transfer were a major motivation. Second, CDM projects were supposed to improve energy efficiency or facilitate the buildup of energy infrastructure in its less developed regions. We therefore found a strong involvement of various state agencies. Third, the Chinese government taxes CDM projects: usually the rate is 2% on the revenues generated, but in some projects, such as industrial gas, taxation may be stepped up to 65%. Profits are channeled into a newly set up “CDM Fund,” which is supposed to finance renewable energy projects. Similar to its regulatory policies vis-à-vis foreign direct investment, the state makes sure that foreigners do not acquire majority control in Chinese projects. Therefore, CDM projects can only be set up in companies that are at least 51% Chinese owned. Finally, the government has set an unofficial floor price for CERs to avoid dumping prices. Overall, the state relies heavily on traditional command-and-control and regulates rather top down. Apparently, the Chinese state has captured the carbon market. In India, a high-level committee on climate change has been set up. The link to the developing carbon market is seen as an overall opportunity to enhance domestic growth and diversify business. Openness toward CDM projects thus very much resembles India’s opening up toward foreign investment. With the maturing of the Indian carbon market, CDM activities are no longer considered exclusively a business issue. State agencies expect individual CDM projects to contribute to investment in public infrastructure, such as the electricity sector. Interestingly, some state governments (e.g., Punjab) are more active in setting up CDM projects than others. India’s regulatory structure, however, has faced serious criticism, as a lot of CDM projects— specifically in wind energy, and significantly more than in other countries—did not satisfy additionality criteria. In the meanwhile, the Indian DNA has responded to such concerns and has taken various steps to improve the quality of its operations without falling back to bureaucratization and overregulation. Overall, the Indian state appears to act as a market facilitator.

The CDM’s Effectiveness By effectiveness, we essentially mean the achievement of set goals. In the case of the CDM, effectiveness is high when (a) cost-efficient GHG mitigation has been taking place and (b) when CDM projects contribute to sustainable development in a broad(er) sense. As the question of mitigation is verified by the DOEs, we have focused on the CDM’s contribution toward sustainability. In negotiations on international climate change, the interpretation of whether an individual CDM project is contributing to sustainability was deliberately left to be decided at the national level. Brazil is taking the sustainability aspect seriously and has developed its own criteria on sustainable development. These include, for example, a set procedure for public consultation on all proposed CDM projects. Most projects, however, receive no comments at all. The Chinese government’s main objective seems to be that the CDM should provide foreign investment and help transfer technology


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while the entire process, plus ownership, is under Chinese control. In India, the issue of sustainability takes up less prominence but energy efficiency and distribution are stressed. Thus, the Indian government aims to increase rural electrification through CDM development. Although these results still have a preliminary status, the CDM’s direct contribution toward sustainability appears to be rather low. Again, we have a very diverse picture regarding the CDM’s contribution to sustainable development, and there is no doubt that the overall record is not yet satisfactory. Nevertheless, the CDM has been effective in various other ways. First, there has been quite a significant output as 1,176 projects have been set up in Brazil, China, and India (out of a total of 1,700 projects registered), amounting to 77.4% of all CER issued. Second, the CDM has led to a significant improvement in national and subnational capacities to deal with climate issues. Within a very short time, a large number of project developers, consultants, and financial experts have evolved in the private sector. Similarly, governments have increased the number of professional staff dealing with the climate policy of their country. Although in a country like Brazil the “carbon governance community” is still rather small, the counterfactual that it would hardly be existent without the CDM seems fair. Finally and closely related to the second point, the CDM has, according to our observations, also contributed to a repositioning of newly industrializing countries in the international climate negotiations. The more active participation of Brazil, India, and China in the last COP (December 2008), for example, was partially motivated by their wish to influence any change in the international CDM regulation to their advantage. In short, the CDM has had unintended positive consequences in carbon governance that should not be overlooked. These consequences again differ from country to country and no coherent picture has emerged so far (see table 2).

Why Divergence? Our explanation for divergence is the political and economic salience of the CDM in particular and the importance governments have attached to the issue in general. In the more advanced developing countries, carbon governance has become too important for simply doing business as usual. This holds true also for the international level where some of these countries are now major players, questioning the traditional Western hegemony. Carbon governance is, however, also a political issue domestically, and there is substantive “ownership” in all three of our country cases. In Brazil, the government initially pushed for high integrity to get the CDM off the ground in a proper way. In China, the central government is now actively pushing for a swift development of the CDM, also in its eastern provinces and more remote areas. And India’s public administration has, so far at least, worked much better and more efficiently toward CDM management than in other public policies. Economically, China (in particular) perceives the CDM essentially as a business opportunity and makes every effort to generate as many CDM projects as possible and to gain as much as possible financially. Neither India nor Brazil has made use of the CDM to such an extent, although India’s attempt to boost investment in sectors where public and


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private activities fall behind national development targets (e.g., in rural electrification) indicates that the government is aware of the economic opportunities of carbon governance as well. Therefore, the CDM is a clear example for the state to maintain a decisive role, despite global pressures to the contrary (for a similar conclusion in the field of environment more generally, see Drezner, 2001).

Conclusion What are some of the broader lessons from our research? First, our results show that the CDM has not initiated a race to the bottom at the cost of broader sustainable development objectives. Furthermore, at least in our cases (Brazil, China, and India), there is a high level of ownership of the CDM. This is of importance for policy as there are strong inclinations, in particular within the European Commission, to completely reform and potentially abandon the CDM. China or India will, however, not give up on the CDM that easily. Although these countries could be tempted to opt for sectoral commitments in return for concessions on financial and technological transfers from Annex I countries, there is no reason for them to give up the CDM’s project-based approach until such agreements have been put in place as part of the Kyoto follow-up and the CDM infrastructure integrated into a succession system. Second, the CDM has had an important impact in newly industrializing countries. Despite the fact that the CDM may be governed differently, the CDM has fostered local businesses to get involved in the global carbon market and has thus contributed step-by-step in establishing appropriate market mechanisms in the environment. Such developments may now also have spillover effects into other environmental markets. Again, this is an important aspect for future policy discussions as it shows that market instruments, just like any other governance instrument, need some time to have an impact and also need continual readjustments. Third, the CDM has also led to substantial transfers of resources—both technological and financial—from the North to the South. Although this has not reduced general inequalities within the global system (Roberts & Parks, 2007), transfers have indeed been quite impressive. This supports Biermann’s thesis that in environmental policy making, the South is much more powerful in negotiating international deals than in other sectors (Biermann, 2007). Fourth, we have just started to analyze (and understand) environmental governance in developing and newly industrializing countries. As our introduction has shown and as the following case studies will highlight, we see more variance than expected but do not know whether this is just a temporary phenomenon or if we need more work to come to a theoretically better informed picture. Finally, governance arrangements set up to take advantage of the opportunities provided by the CDM have resulted in unintended consequences. The CDM seems to be contributing to a broader debate on sustainable development in all three countries examined. Beyond generating financial resources for technology transfers, CDM operations appear to have played an important role in raising public awareness for climate change


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issues and the need for swift action, that is, for designing adequate policies of mitigation and adaptation, both abroad and at home. This appears on its own to be a significant contribution to advancing the global climate regime during the post-Kyoto phase. Acknowledgments The authors thank the editor and three anonymous reviewers of Journal of Environment & Development for their helpful comments. They are also grateful to the participants of the Workshops “Varieties of Carbon Governance” held in Potsdam in July 2008 and “Politikwissenschaftliche Forschungen zum Klimaschutz: Bilanz und Ausblick” at the Freie Universität Berlin in January 2009 for valuable suggestions on earlier drafts.

Declaration of Conflicting Interests The authors declared no potential conflicts of interests with respect to the authorship and/or publication of this article.

Funding Research was funded by the German Research Foundation and carried out as part of the research centre 700 “Governance in Areas of Limited Statehood.” (www.sfb-governance.de).

Notes 1. Of the three Kyoto mechanisms mentioned (International Emission Trading (IES), joint implementation, and clean development mechanism [CDM]), the CDM is the most important to date, generating trade of US$12 billion in 2007 (Point Carbon, 2008). Fund-based carbon governance projects, for example through the global environmental facility, of course predate the CDM and still contribute to capacity building and technology transfer, but they have never generated the same amounts of money as the compliance market. 2. Convergence refers to the fact that the aims, instruments, and standards of specific policies resemble each other subsequently across nations, no matter what the cause (Kerr, 1983; Knill, 2005; Lütz, 2007). The underlying transfer can be initiated through hierarchies (coercion), competition, bargaining, deliberation, or lesson drawing (DiMaggio & Powell, 1991; Dolowitz & Marsh, 2000; Lütz, 2007; Rose, 1993).

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Bios Harald Fuhr holds the chair of international politics at the University of Potsdam and is coordinating the research project D3 “New Modes of Governance in Climate Protection: Green Companies in Newly Industrialising Countries” of the Collaborative Research Centre SFB 700 “Governance in Areas of Limited Statehood.” Markus Lederer is an assistant professor at the chair of international politics at the University of Potsdam and assistant project manager of the research project D3 “New Modes of Governance in Climate Protection: Green Companies in Newly Industrialising Countries” of the Collaborative Research Centre SFB 700 “Governance in Areas of Limited Statehood.”
