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

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

SFB Project D3: Emerging Modes of Governance and 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

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

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

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

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.

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

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

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?

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)

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)

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

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

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

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.

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.

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

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

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

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?

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