Permit Trading in Different Applications

1. Permit Trading in Different Applications • 4th Research WorkshopHalle-Wittenberg; 29.11.-01.12.2006 • „Governance in the Framework of the Clean Development Mechanism“ • Gudrun Benecke

2. SFB 700: Governance in Areas of Limited Statehood • The Research Center (SFB) 700 focuses on the following question: • How can effective and legitimate governance be sustained in areas of limited statehood? Which problems emerge under these conditions? • Funded by the German Research Foundation – DFG for up to 12 years • Four research areas: • Theory building • Political authority and rule making • Security • Welfare and environment • 16 research projects involving approx. 60 researchers, five research institutions

3. SFB Project D3: Emerging Modes of Governanceand Climate Protection • Research Leader: Professor Dr. Harald Fuhr • Goals: • Analyse the contributions from carbon market actors to the formation of new modes of climate protection within the framework of the Clean Development Mechanism (CDM) of the Kyoto-Protocol • Analyse the impacts of the CDM in the wider socio-political governance context of three case study countries: Brazil, China and India

4. Research Part I: Conceptualising the CDM Facilitation + Pressure from NGOs Demand for CERs from TNCs Market facilitation from intermediaries Financial Capacity + Expertise from Int´l. Org´s and IFI´s Capacity building + demand for CERs from govern-ments Creation of CDM-Projects Supply of CERs by CDM projects Demand for investment in clean technologies and support for local sustainable development

5. Conceptualising the CDM – Analytical Steps • Origins and fundamentals of the CDM • Researching the CDM – Academic research perspectives • Political science approaches: Open issues and debates • Step I: Stakeholders‘ analyses of the CDM • Step II: Interpreting the findings – Applications from governance theories

6. The CDM - Origins and Fundamentals Majority of CDM credits from a small number of projects on industrial gases – cost efficient mitigation option Majority of projects are in renewable energy and energy efficiency – contributing to local sustainable development

7. Growth of total expected accumulated 2012 CERs Source: UNEP Risoe Centre, 20.10.06 • 1276 CDM projects proposed. If all accepted, the amount available at the end of 2012 would be 1373 Million CERs (current approval rate 74%). • CDM market value: 1.9 € Bn in 2005; China, India and Brazil are responsible for about 72% of the total volume for all CDM projects.

8. What does the CDM deliver? • Dual objectives of the CDM: • Cost efficient mitigation of climate change • Sustainable development effects • Conceptual roots: Environment and climate as public goods in shifting national and global contexts • Policy options: Theoretical concepts and practical approaches to securing environmental public goods • Implications of the CDM: • Constitution of climate mitigation as a global public good • Rendering climate protection a (global) governance function

9. Studying the CDM • Economist Approaches • CDM conceived as market mechanism • Environmental economics: market-based approaches to tackle policy issues and common goods problems • Research interests: functioning of the carbon market; transaction costs; methodologies; project procedures (additionality…) • II) Political Scientist Approaches • CDM conceived as policy instrument • International Relations: integration of the CDM in the climate change regime; interests/power relations and actors‘ constellations in the CDM (PPP, networks); diffusion of climate protection as socially constructed norm

10. Research gaps – open questions…. • Premise: understanding the CDM as hybrid of a (hierarchically) regulated, market-based policy instrument • What kinds of stakeholders engage in the CDM and how do they interact? – micro analysis • Under what conditions/why are actors involved in the CDM and what determines their transaction modes? • What changes have taken place since the initiation of the CDM and what do these imply? • What does the organisation and operation of the CDM mean in terms of achieving the objectives set out? • To what extent does this reflect on the effectiveness and efficiency of the CDM?

11. Governance Perspectives on the CDM • Origins of governance approaches • Multiple level effects of economic, social…globalisation • Traditional problem solving approaches under threat • Relocation of authority from central level • Understandings of ‚governance‘ • Application in different academic disciplines (politics, economics) – myriad of definitions • Agree on transition away from hierarchical steering • Broad understanding: „mutually existing forms of collectively regulating all societal issues“ (Mayntz 2001)

12. Applying the Governance Perspective • Research questions: • What modes of transactions involving what kinds of stakeholders are observed and what kinds of regularities emerge? • Under what motivations do stakeholders engage in the CDM? • Methodology: • Stakeholder Survey on the CDM • (August-October 2006)

13. Preliminary Findings Stakeholder Group I - ‚EU ETS companies‘ • Engagement • Companies with largest CO2 emissions in 10 EU countries + Japan selected on hypothesis that larger companies have both higher motivation and capacity to get involved in CDM • Apart from investing in own installations, companies predominantly engage in the CDM through funds and less with own projects • II) Motivation • CDM as risk management instrument for hedging their carbon strategy • Learn for future, build know how even if CDM does not play key role • Early mover advantage • New commodity established, opportunity for trading and speculation • Tap efficiency improvement potential in own installations as CDM • Green image not seen as strong reason to engage in CDM • CDM as a new business opportunity in developing countries

14. Stakeholder Group II - Intermediaries • Advisory services to buyers and host countries • Move by carbon consultancies from selling project CERs to pooling project CERs • Speculative capital enters carbon market, e.g. American hedge funds

15. Stakeholder Group III – European governments • I) Engagement • - Direct engagement: Use of CERs for own Kyoto compliance, supporting/subsidising domestic industry • - Indirect engagement: Supporting capacity and institution building for the CDM • II) Motivation • Distinct national interests: • Germany: Promotion of CDM as export opportunity • UK: Position London as the carbon finance centre

16. Stakeholder Group IV – European NGOs • CDM is not top priority, e.g. compared to EU ETS, due to its complexity and capacity constraints of NGOs. • Engagement of NGOs depends on their government‘s use of CDM for compliance. • Lobbying for Gold Standard and limitation on usage of CDM in NAPs.

17. Applying Governance Theories • Caveats: • Demand for all activities undertaken to deliver on societal issues and problems to be intentional • Demand for legtimacy of procedures and processes applied to regulate societal issues • Application to the CDM: • Re: a) When referring to the stakeholders‘ motivations, not all of them consider either CDM objective as main intention (e.g. intermediaries). • Re: b)Trans/Interactions in the CDM most of the time do not integrate the state and are thus not directly legitimate to the constituency governed.

18. Alternative governance perspective • The equivalent functionalist approach • Broad understanding of governance as all modes of collective action • Defining governance as all action delivering on a distinct governance function • Potentials • Governance functions as central reference objects do not demand for actions to be intentional • Broad definitions acknowledge for a shadow of hierarchy to be a sufficient condition rendering actions legitimate • Enable comparative evaluation of different approaches towards delivering on a governance function

19. Governance and the CDM • Defining the governance function of the CDM • Overall governance function: (globally) mitigating climate change • Secondary governance objectives: cost effectiveness in mitigation and sustainable development through mitigation • II) Governing in the CDM • Intentionality: stakeholders‘ motivations for engagement reflect on how closely they relate to the governance functions • Legitimacy: procedural and institutional regulatory framework secures a shadow of hierarchy as minimal condition

20. Governance and the CDM • III) Governance modes within the CDM • Institutional/regulatory framework setting: dynamic; multi-stakeholder integration although states/NGOs/IOs more directly involved; constitutes ‚shadow of hierarchy‘ • Direct operational engagement: project actions by states/companies; longer-term relations; fewer intermediaries; greater visibility of stakeholders • Indirect operational engagement: CER request and acquisition; short term relations; more intermediaries; greater variety of interests • Indirect CDM operations: secondary market transactions with CER commodity; indirect, fluid, changing interactions

21. Added value and open questions • Effectiveness: • - How effective are the different governance modes in delivering on the CDM overall governance function? • To what extent do stakeholders‘ motivations impact on the effective outcome of the governance process? • Efficiency: • To what extent do secondary governance functions change in the evolution of the CDM?

22. Questions Thank you for your attention! Gudrun Benecke gbenecke@uni-potsdam.de