Governing the carbon economy

The criticisms of carbon markets discussed in the last chapter -whether focused on the effectiveness or inequities of such markets -raise the issue of governance. By what rules should carbon markets be governed? Who should make these rules? To whom should they be accountable?

Many economists, and those pushing for the free-market policies of the last 25 years (who we called neoliberals in Chapter 2) would respond to the question of governing markets with a quizzical look, because for them markets regulate themselves, hence the question of governance is not relevant. That's what markets do. Set up the minimal rules of play, allocate property rights and let the market do the rest. Or, in the case of climate change, hand out the emissions permits (or, better still, auction them) and sit back and let the trading begin. According to this logic, investors will seek out the best opportunities to profit from clean technology and projects that reduce overall emissions of greenhouse gases (GHGs) without the need for government steering. The rhetoric behind the trading schemes we discussed in Chapters 5 and 6, whether it is the EU's Emissions Trading Scheme (EU ETS) or the private-sector Chicago Climate Exchange, embody this logic. Many market actors like Point Carbon or the International Emissions Trading Association are currently pushing for the Clean Development Mechanism (CDM) rules to be relaxed to make it easier to get projects approved, using similar rhetoric.

However, while it may be true, as free-marketeers suggest, that markets to some extent govern themselves (hence the popular phrase 'market discipline'), to construct a market nevertheless entails a considerable amount of governance from 'outside' the market. When you actually try to create a market, it turns out you can't just do the minimum of creating property rights and enforcing contracts. You also need to define rules by which trading can occur, set up elaborate accounting systems to measure emissions and make companies report on them and create complex methodologies by which a project may be deemed to have reduced emissions. Seen in this light, the claim that the market regulates itself is naïve to say the least. Adam Smith's famous invisible hand (by which left to their own devices markets will deliver the most efficient outcomes) in practice needs, if not direct guidance, then a lot of regulatory infrastructure behind it, in order to work.

But if they are naïve, then free-market neoliberals are equally irresponsible. As highlighted in the previous chapter, the critics of carbon markets ably point out the various problems involved in these markets where ideology favours the minimum regulation possible, and weak institutions result. As Larry Lohmann suggests, '... trading is often a singularly inefficient way of attaining goals ... when the necessary conditions for trading - measurement instruments, legal institutions and so forth - are inadequate'.1 We don't have to look too far in other directions (think Enron, Long Term Capital Management, the sub-prime-cum-'credit crunch' crisis) to see how, if financiers are left to their own devices, making money as quickly as they can with minimal supervision, all sorts of scams, injustices and crises inevitably result. Carbon markets risk being no different - the problem of 'subprime carbon' has already been identified.2

Beyond the problem of scams and exploitation, carbon markets are rather different to other markets. They do not exist for the sake of it. They are not ends in themselves, but exist as a means to achieve a specific social purpose - to enable societies to reduce GHG emissions. Free-marketeers struggle to understand this aspect of carbon markets, seeing them as neutral and natural social institutions that have no goal other than enabling market participants to maximise profit, and thus ought not to be interfered with since they know best how to do this.

The danger that cowboy operations pose to the credibility of carbon markets as a whole may, however, persuade some market believers that a measure of regulation may be necessary to secure the collective good of a market-based response to climate change. The parallel with

1 L. Lohmann (ed.), Carbon Trading: A Critical Conversation on Climate Change, Privatisation and Power. Development Dialogue No. 48, September (Uppsala: Dag Hammarskold & Corner House, 2006).

2 Friends of the Earth US, 'Subprime carbon? Re-thinking the world's largest new derivatives market.' See

the current financial crisis is again striking, with neoliberal economists having to concede that there may be a case for greater regulation of the banking and financial services sector, that greed doesn't always mean good.

The critics are in effect right that an under-regulated carbon economy will produce enormous problems. But they are often mistaken on two things. One is a similar mistake to the one neoliberals make: to assume that carbon markets exist largely without intervention and oversight, when in fact the carbon economy is already highly governed. Once we accept this, the question rather becomes what sorts of governance, for whose benefit and towards what ends? The second mistake is to see themselves - the critics - as existing outside the dynamics of carbon markets, looking on, protesting about carbon markets, but not having any impact on them. However, as we saw in the previous chapter in relation to how standards have developed in the voluntary carbon markets, protest and criticism in fact stimulates efforts to govern these markets more carefully. It creates legitimacy crises that affect levels of confidence and interest in carbon markets and so ultimately their value. Other examples of this dynamic would include efforts to create a CDM Gold Standard that privileges projects that meet tougher sustainable development criteria, or the shift towards auctioning in the EU ETS. The former was a response to concerns about the CDM not bringing sustainable development benefits to host communities and being overly focused on projects which eliminate industrial gases with few positive spin-offs. The latter can be seen in the light of protests about the windfall profits earned by some companies in the first phase of the EU ETS because of the over-allocation of permits. Governance often develops, then, in response to NGO campaigns and criticisms.

The question, then, is not to assume (for good or ill) that there is no carbon market governance, but to understand how those markets are governed, in order to identify what the principal weaknesses and strengths of that governance are, how different bits of governance interact with each other and then to think about how to improve the system of governance. So how then is the carbon market governed and what is its purpose?

actually existing carbon economy governance

First, a word about governance. At least two things are entailed in this bit of academic and policy jargon. One is that governance is not confined to those ways that rules are developed and enforced through some central power that can impose its will by force. Governance implies that many rules may be followed not because of the threat posed by state power, but rather because of a range of more subtle pressures - to conform to collectively agreed norms, because your actions are highly visible and you value your reputation; or because you understand that your interests are served by the general observance of the rule, and that requires you to do what you expect of others.

The second point of the term governance is that it is no longer only governments who get to make the rules. As we have seen, many of the rules in the carbon markets are being made by private-sector actors and occasionally by NGOs.3 Some people are, of course, nostalgic for the good old days when states exercised greater sovereignty. But the sorts of changes in the powers of actors like large corporations or transnational NGOs associated with that other over-used buzzword 'globalisation', are both probably irreversible, and in fact also might be put to good use in responding to climate change.

Table 9.1 shows the different types of governance operating in the carbon economy we have discussed in earlier chapters. It illustrates well the point made above that the carbon economy is fundamentally already governed - it entails a complex set of rules which aim to shape the behaviour of governments, companies and individuals. The question is whether it works well and whether it is enough.

Three basic sorts of governance can be identified. Some parts of the carbon economy are governed by quantity; that is to say, rules are set which establish overall limits for carbon emissions, allocate them among different players and attempt to enforce those limits. Governments do this when they set a national target, or specific targets, for economic sectors. Governments also do this collectively when they negotiate among themselves individual national targets, as in the Kyoto Protocol or the EU agreement for sharing the burden of the EU's overall target among its member states. But private actors can also do this, as in the Chicago Climate Exchange, where member companies have agreed to an overall cut of 6% in their emissions by 2010. Individual companies of course also set themselves targets for emissions reductions - most radically in those that attempt to become 'carbon neutral', like HSBC, as we saw in Chapter 3. Governing by quantity involves a series of secondary rules - to measure emissions, report on them and to allocate targets among actors.

3 H. Bulkeley, and P. Newell, Governing Climate Change (London: Routledge, 2010).

Table 9.1. Types of governance

Primary mode

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