Of Markets and Madness

The time: December 2011, half a year from the Rio+20 summit in June 2012. The place: COP17 in Durban. The context: plummeting prices of carbon and a lack of interest from investors amid failure of state negotiators to agree on near term legally binding cuts in greenhouse gas emissions on anything like the scale required to drive investments in low carbon development or, more importantly, to keep warming below 2 °C. The conclusion: climate policy is clearly at a critical juncture. Efforts have been made to put in place incentives for those actors interested in benefitting from a low carbon development path that slowly transitions away from the dependence of the current global economy on fossil fuels to meet its needs. But coalitions of the “willing” and the “winning” from such strategies of de-carbonization are neither powerful enough, nor operate in a strong enough enabling environment, to overcome resistance to change from the many actors in the coal, oil and gas sectors and the major industries they serve that benefit from continued dependence on fossil fuels, whatever the human and ecological cost.

Engagement with the private sector is nevertheless essential. If the scale of finance required by the Green Climate Fund agreed at Copenhagen and Cancún (US$100 billion a year by 2020), and whose governance was further elaborated in Durban is to be delivered, private money will have to make up the substantial short fall in public funds in a context of diminished spending and austerity measures. The High-level Advisory Group on Climate Change Financing concluded in 2010 that some of this money should come from the carbon markets whose fortunes currently look so dire. Investments in low carbon infrastructures in the energy, transportation and agricultural sectors, meanwhile, will rely on levering large-scale private capital to bring about change not only in the richer North but also in the global South where vulnerability to the effects of climate change is greater and where perhaps greater opportunities exist to avoid pathways which lock-in dependence on fossil fuels for the next 40 or 50 years. How all of this is to be achieved remains to be worked out for the most part, but public–private partnerships, technology transfer, and cobenefits for developing countries look set to play a big part.

The experience to date of Clean Development Mechanism (CDM) of the Kyoto Protocol is worth bearing in mind in this regard when thinking about what lessons might be learned from previous (and existing) efforts to combine these goals. It was envisaged as a mechanism that would lever private finance for mitigation in parts of the world where emissions savings could be achieved more cheaply. It embodied an explicit commitment, contained in Article 12 of the Kyoto Protocol that projects which help Annex 1 Parties to meet their emissions reduction obligations should also bring sustainable development benefits to countries and communities hosting the projects. These are to be defined by the host country itself and often include job creation, technology transfer or local health and environmental benefits. Yet whether they have been achieved is not assessed either by national authorities that approve the projects, or the bodies that verify them. They are also not valued in monetary terms so the emphasis has been on scale and ease of emissions reductions that can be quantified and for which credits are received, rather than on ensuring cobenefits are produced.

The future of the CDM is in balance with no agreement so far on a second commitment period, the exclusion by key funders of projects such as the EU of those countries that have secured the majority of the projects so far, such as India and China, and the fact that many countries have been able to achieve weak targets in a time of recession without resort to the CDM. The EU ETS (emissions trading scheme) will of course continue to generate demand and there is hope among enthusiasts of the CDM that other countries will include CDM CERs (certified emission reductions) in their domestic emissions trading schemes (e.g., Australia, Korea, and China). Bilateral and multilateral donors and development banks are also seeking to keep the market afloat through support to favored projects and methodologies. But as the debate continues apace about scaling up the CDM, moving toward sectoral crediting, or fusing CDM and NAMA (Nationally Appropriate Mitigation Actions) funding streams for mitigation, as well as how to leverage enhanced technology transfer, the Rio+20 summit in June 2012 would do well to bear in mind a few key lessons about the past experience with market mechanisms and public private partnerships when considering the design of future such schemes.

First, the evidence from the CDM and ETS is that extensive rules and regulations are required to establish, update, and revise as well as enforce the rules of the game. This is contrary to claims from proponents of market mechanisms that they reduce transaction costs, provide bottom-up solutions and reduce the regulatory burden. They do not. Large demands are made of public bureaucracies that do not often have the capacity to meet them: to approve projects, determine national allocation plans (in the case of emissions trading) and regulate market participants (which sectors are and out, which private agencies can be trusted to have authority delegated to them to monitor and verify compliance). This in itself has large resource implications. For the governance of market mechanisms to be effective and legitimate, attention needs to be paid to aspects of “good” governance: transparency of flows; measures for identifying and dealing with evidence of collusion and corruption between a limited range of actors with the necessary expertise and skills; and adequate systems of participation, representation, and accountability, especially to actors invoked as the beneficiaries of projects and partnerships.

Second, if development benefits are not to fall off the agenda, systematic methods of recording and evaluating cobenefits need to be incorporated, and actors rewarded financially to incentivize them to take the process of identifying projects and distributing their benefits seriously. Donors and initiators of new schemes need to coordinate their efforts to ensure a division of labor (and finance) that reflects a diversity of sectoral, regional, and target group needs and prioritizes the most pressing ones. Ad hoc strategies combined with interagency competition, as often results in the current distribution of funds for mitigation and adaptation, are unlikely to achieve this.

Third, and related to the previous point, is the need to ensure environmental integrity. This is not just about tightening up rules around additionality and maintaining clear control over which authorities get to issue credits in the face of pressure to devolve this to country level. It is also about focusing efforts on projects, sectors and interventions where the highest levels of cobenefits are likely to be achieved and where other funding streams, public or private, are not already available. To preserve credibility, this cannot include further support to fossil fuel projects as has happened in the CDM, or to technologies that prolong the life of fossil fuels—such as carbon capture and storage as was recently agreed at Durban. Improved efficiencies in the production and disposal of fossil fuel emissions can be achieved by other means where strong incentives already exist to do so. The focus going forward has to be on sectors and technologies that enhance poor peoples’ access to renewable energies that bring multiple economic, health, and environmental benefits. In this sense, proposals by governments such as Japan and business groups such as Business Europe for the adoption of the principle of technology neutrality, whereby any technology or methodology which claims to reduce emissions can be awarded carbon credits, need to be resisted. This does not require a future CDM or technology executive, for example, to “pick winners” or override developing countries’ rights to define sustainable development for themselves, but it does require a strategic and principled view to come from the Conference of the Parties about where investment is most needed and by whom in order to tackle climate change.

Fourth, and perhaps most important, is the need for richer countries to demonstrate the viability and desirability of alternative pathways to development that are low carbon and socially just. If they fail to do this, attempts to persuade other rapidly developing countries that low carbon transitions are the way to go will be largely ineffective. However, powerful (if not always convincing) arguments might be about efficiency, displacing and outsourcing the primary responsibility that richer countries have for reducing their own emissions to poorer countries, can only be justified as a means of buying time, while they restructure their own economies to the realities of life in a carbon constrained world. There is currently precious little evidence that they are doing this.