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Note: measures in square brackets indicate governance measures not currently widely adopted.

Governance by price is, in emissions trading systems, a logical extension of governing by quantity. Allocating emissions targets, as long as it produces scarcity, creates demand for trading, which will create a price for carbon emissions permits. As in other markets, this price then exerts a governing effect on behaviour, creating an incentive to reduce emissions so as not to have to buy so many permits. Other carbon markets, especially when they are linked to an emissions trading scheme (as in the CDM-EU ETS link) function similarly -through the creation of monetary incentives to reduce emissions. But price can also be affected directly, through carbon taxes. Some governments have instituted such taxes (despite their unpopularity) and they remain a possibility for transforming the incentives individuals and companies face.

Governing by price, especially through carbon markets (carbon taxes are rather simpler) entails the development of considerably more complex rules than just governing by quantity. Not only do you have to measure and report on emissions, but you have to decide how and when they can be traded and by whom. You have to work out accounting rules which prevent double-counting, and how to enable trading across different systems, assuming that linking different markets makes them more efficient. For project-based mechanisms like the CDM, you then also need rules to deal with all the counter-factuals involved in such a project - how to measure the emissions foregone because of the project (its 'additionality'), how to verify that the emissions reductions have occurred, and how to award credits for the projects. Figure 9.1 illustrates just how many actors are involved in the CDM to make this market work. There are roles for national government agencies (Designated National Authorities), for international institutions (CDM Executive Board), as well as a range of private actors that help investors develop project proposals and then the Designated Operating Entities that audit and verify whether claimed emissions reductions have taken place. There is a highly elaborate web of governance actors that oversee the creation of Certified Emissions Reductions (CERs).

Governing by disclosure is perhaps more simple. Businesses and other actors are required to report on their emissions profiles. Still, to enable investors to make decisions based on a company's carbon intensity or its policies to reduce its emissions, good quality data reporting and consistent reporting across companies to make them comparable is necessary; this entails elaborate rules about how to measure and calculate emissions. If it is to achieve its goal, it also then entails a more deeper cuts, with the G8 meeting in July 2009 for example proclaiming a goal to limit temperature change to 2°C over pre-industrial levels, reducing G8 emissions by 80% by 2050 and global emissions by 50% by 2050.4 But even this is considerably less than the IPCC regards as necessary, and there is considerable doubt as to whether the emissions cuts they propose would actually limit temperature change to 2°C. This much is well known and accepted (apart from by the vocal but relatively small in number climate change deniers), but it is crucial in terms of the effectiveness of carbon markets. The latter depend fundamentally on scarcity in the supply of carbon permits if they are to stimulate the technological and social innovation needed to decarbonise the economy. If there is no scarcity, then the price will be low and changes in behaviour will be minimal. It looks like the targets for the post-Kyoto era will be stronger, but gives the Copenhagen Accord it is unlikely that collective cuts by industrialised countries will be more than 20% (and may be less), and this leaves out emissions reductions in rapidly growing countries like China, for whom no legally binding limits will be in place (even if they accept some voluntary reductions commitments).

The targets that governments have imposed on companies have also often been weak. The allocation problems in the EU ETS are a perfect example here. Behind the weaknesses of the EU ETS is a failure of governance by EU institutions and national governments. Because national governments over-allocated permits in the first round of the emissions trading scheme there was no scarcity in emissions permits, and companies were thus able to reap windfall profits without doing anything to reduce their emissions. As Larry Lohmann puts it: 'In April 2006 it became clear that corporate participants in the EU ETS had been granted around 10% more allowances than they had needed to cover their 2005 emissions. That translated to between 44 and 150 million tonnes of surplus carbon permits or, at 613 [US$18.60] per tonne, up to 61.8bn [US$2.57bn] of free money.'5 As a consequence of this over-allocation, not only were windfall profits realised, but the price collapsed - so that mode of governance also didn't work. Even the major consulting firm, Ernst and Young, who have vested interests in carbon trading, conceded: 'The EU ETS has not encouraged

4 ENDS Europe, 'G8 leaders agree two degrees climate goal', ENDS Europe DAILY, 8 July 2009.

5 L. Lohmann, 'A Critical Conversation on Climate Change, Privatisation and Power...,' p. 87.

meaningful investment in carbon-reducing technologies.'6 While this is perhaps an exaggeration - the World Bank, for example, claims that the EU ETS has helped reduce emissions from regulated companies -it is a systemic problem. Ultimately this is because of the dilemmas faced by governments - while committed to regulating companies to limit emissions, they also want to make sure their own companies are not disadvantaged in European and international markets, and may even offer generous allocations to help particular sectors develop, or exempt them from the scheme altogether.

The second weakness is that flexibility in meeting commitments enables governments and companies to undermine the targets that have been set. Particularly important here is the problem in defining 'additionality' in the carbon offset markets. The Kyoto offset market in the CDM is where these problems are most obvious. The rules fail to prevent various weaknesses - as in the example of large hydrofluoro-carbon (HFC) or hydro projects that would probably have gone ahead in any case. Governance systems are also weak in terms of addressing the maldistribution of projects and investments between and within countries. They currently fall short in their capacity to steer investments to where they are most needed and where they can make a difference. The large, rapidly industrialising countries of China, India and Brazil capture the lion's share of CDM projects, while sub-Saharan Africa hardly gets a look in, as we saw in Chapter 7. The CDM is densely regulated with a complex set of methodological rules. Many individual states have their own rules on top of those. The CDM projects are meant to deliver sustainable development, something that individual countries can define for themselves. But only governments that are highly attractive to investors are able to lay down conditions such as this. China remains the leading player in the CDM, despite rules that require 51% ownership of CDM projects by the Chinese state, arrangements that guarantee the Chinese state a share of the CERs that accrue, as well as revenue from taxes on CDM transactions. Most poorer countries, which are less attractive to investors, have less bargaining leverage to shape carbon finance on their own terms.7

6 T. Ward, energy director Ernst and Young, May 2006. Cited in Open Europe, 'The High Price of Hot Air: why the EU ETS is an environmental and economic failure'. See http://www.openeurope.org.uk/research/ets.pdf, accessed 1 October 2009.

7 P. Newell, L. Jenner and L. Baker, 'Governing Clean Development: A Framework for Analysis', The Governance of Clean Development Working Paper Series, no. 1, University of East Anglia (2009). See www.clean-development.com.

Third, the voluntary market is even more prone to such problems. Offsets are far less regulated, with offset markets often being equated with the 'wild west' when compared with the CDM.8 Because it is largely uncoordinated and has little institutional oversight in terms of the monitoring of claimed reductions, multiple investors can claim emission reductions from the same project. This has raised a series of problems about quality and credibility, which new standards in the voluntary sector, discussed below, have sought to address. Private and self-regulation, where companies set their own targets, as we saw in Chapter 3, face similar issues of lack of sanctions and comparability across initiatives. This is not to say that voluntary commitments do not make an important contribution, but we simply don't know how much of a contribution they make. Recent attempts to calculate the net effect of carbon saved by the range of existing voluntary initiatives on climate change have concluded that it is simply impossible to say.9 The benchmarks used are different, the range of gases covered varies and the time-frames employed are highly variable.

Given the uncertainties involved and the discretion powerful actors have to set their own targets and establish their own preferred systems of governance, it is easy to see why climate activists cry foul and level the charge of 'climate fraud' at the money-makers, brokers and intermediaries that manage the carbon economy. Some might argue that letting all flowers bloom in a carbon-constrained world might not be a bad thing, especially in a context of diplomatic stalemate over a future climate regime. Harnessing the energy and dynamism of private actors to the goal of climate change may well be a good thing. But someone has to do the sums. What is the net effect of all these private, dispersed and only loosely regulated actions? Only by knowing this can we know what progress we are making.

Part of this governance gap results from the legacy that neo-liberalism has bequeathed climate politics. While it has created the possibility of carbon markets as a 'solution' to climate change, it also instinctively favours very light-touch regulation that can leave space for climate fraud. Its presumption is that voluntarism and

8 M. Estrada, E. Corbera and K. Brown, 'How do regulated and voluntary carbon offset schemes compare?' Tyndall Centre Working Paper, no. 116, May (2008). See http://www.tyndall.ac.uk/content/how-do-regulated-and-voluntary-carbon-offset-schemes-compare.

9 P. Mann, and D. Liverman, 'An empirical study of climate mitigation commitments and achievements by non-state actors', presented at the Amsterdam Human Dimensions of Global Environmental Change conference, 24 May 2007.

self-regulation are more efficient and effective than state-led, legally binding approaches. But it is also true that experiments in de-regulation and non-regulation in carbon markets have often led to regulation and re-regulation. When EU car-makers argued in 1998 that regulation from the European Commission was not needed and provided too clumsy an instrument to improve the fuel efficiency of cars being produced, they suggested a voluntary approach, which was indeed developed. Following ongoing talks between the European Commission and the car industry, the two parties concluded a voluntary agreement, setting a mid-term target of 25% reduction on CO2 emissions from motor-cars by 2008. However, by February 2007, the European Commission had to insist on mandatory targets for CO2 emissions from cars after it had become clear that the car industry was failing to meet targets agreed under the 10-year voluntary agreement on CO2 emissions.10 Even industry lobbyists from Business Europe, that had trumpeted the scheme, admitted that the car-makers' failure to make good on their promises was 'highly embarrassing', undermining the general credibility of voluntary approaches.11

For market-based solutions to climate change to help address climate change, they thus need to be governed by strong rules. The Stern Review, commissioned by the British government, which made a strong economic case for early action on climate change, argues that global warming is the biggest example of market failure ever. It argues that the state has to play a significant part in redressing the balance, even if it is an 'ensuring state' as suggested by Anthony Giddens.12 Some of the world's leading carbon entrepreneurs would welcome more direction through regulation. Many business leaders are hesitant to go further with action on climate change because of uncertainty regarding the overall policy framework and, related, the price of carbon. In a recent open letter to President Obama and Congress a group of leading firms, including household names such as Starbucks, Hewlett Packard, Levis and E-bay, leant their weight to calls for climate legislation. The letter stated: 'We support this legislation because certainty and rules of the road enable us to plan, build, innovate and expand our businesses. Putting a price on carbon will drive investment

10 Corporate Europe, 'Car industry flexes its muscles, Commission bows down', Briefing paper, Observatory (CEO), 16 March 2007. See http://www.corporateeu-rope.org/carlobby.html.

11 Meeting with representative from Business Europe, European Parliament, Brussels, April 2008,

12 A. Giddens, The Politics of Climate Change (Cambridge: Polity, 2009).

into cost-saving, energy-saving technologies, and will create the next wave of jobs in the new energy economy.'13 The same is true for traders of offsets in the carbon economy. If there is no value for CERs in a regime to replace the Kyoto Protocol in 2012, the bottom may fall out of the market.

learning: is it getting better?

So the actual governance of carbon markets has a number of major inadequacies. But it is also fair to say that there is a certain amount of learning already going on in governance, precisely in response to weaknesses in the way they are currently governed. The model of 'learning by doing', which underpins many of these systems of governance, notably the CDM and the EU ETS, should perhaps be taken seriously. With such innovative forms of policy design, and the range of actors and networks that have to be brought on board, it is unlikely that any institutions could get it right first time.

The EU, for example, has responded to the problems experienced in the first phase - especially the allocation and data problems. The data collection was tightened up in the first round itself. In fact it was the release of better data that prompted the price collapse - since the new data demonstrated that states had over-allocated permits. The Commission bargained much more strongly in the second phase, for 2008-2012, rejecting many countries' submissions, radically reducing the overall allocations of a number of them.14 There are still some problems of over-allocation to specific industries,15 and thus windfalls for them, but much less so at the level of the overall allocation. For the third phase for after 2012, which is currently being developed, the Commission is proposing both an expansion of the sectors to be covered, but, more importantly, a great expansion in the use of auctioning, where companies don't get given permits for free, but instead have to bid for them. This is precisely to respond to the problem of windfall profits.

A similar logic can be seen in the voluntary carbon market, as we have already seen in the previous chapter. The danger for companies

13 'Competing by leading', an open letter to President Obama and Congress. See http://wecanlead.org/ad0623.html, accessed 1 October 2009.

14 J. Birger Skjaerseth and J. Wettestad, EU Emissions Trading: Initiation, Decision-Making and Implementation (London: Ashgate, 2008), pp. 173-4.

15 O. Tickell, 'A licence to print money', The Guardian, 12 September 2008.

in those markets is that the potential for making money is undermined by the loss of faith in the effect of those actions. If all of this rests on guilt - allowing people to buy their way out of trouble while someone else offsets their contributions to global warming - then people parting with their cash want to know they are buying a credible product. Otherwise they will be castigated for paying into a scam - not good for appeasing guilt or generating 'green PR'. For example, a wave of exposés in the mainstream media caused the share value of Climate Care and EcoSecurities to plummet. Carbon brokers are then caught in a bind in the face of companies using offsets to 'greenwash' their activities on the one hand, and the environment lobby on the other waiting to pounce on acts of 'climate fraud'.

This is the driver behind the certification schemes like the Voluntary Carbon Standard (VCS), the Gold Standard and the Offset Quality Initiative. People like the Climate Group together with the IETA (International Emissions Trading Association) have played a key part in coming up with such schemes. As we saw in Chapter 7, some of the standards such as the Climate, Community and Biodiversity standard, or the Social Carbon standard, focus on the social dimensions of offsets, in response to activist critiques of their impacts on host communities. The UK government waded in to provide a code of conduct for offsets, suggesting they had to be accredited by the CDM or bought from left-over allowances not traded under the EU ETS. Its DEFRA (Department for the Environment, Food and Rural Affairs) department announced in February 2008 the framework for the Code of Best Practice for Carbon Offsetting. The Code is voluntary and offset providers can choose whether to seek accreditation for all, or some, of their offsetting products.16 The Code initially covers only CERs that are compliant with the Kyoto Protocol. The UK Secretary of State for Energy and Climate Change, Ed Miliband, has also challenged industry to develop a standard for Voluntary Emissions Reduction credits (VERs), which could be included in the Code in the future, subject to the verification of their robustness. Companies are rarely happy when the government gets involved in what they consider to be their business, and so it is unsurprising that they have sought to develop their own standards of self-regulation. Indeed, recent evidence suggests that offsetters may even be ignoring this Code.

16 DEFRA, 'Government offsetting code announced'. See http://www.defra.gov.uk/ news/latest/2008/climate-0219.htm.

coherence: how does it hang together?

Individually, the governance of carbon markets can therefore be improved, and, arguably, is being so. But what about when we put all these governance systems together? Do they all pull in the same direction in driving low-carbon growth? Can we imagine ways that the whole might become larger than the individual parts?

At the moment, there is only patchy coherence between the various governance institutions discussed above and summarised in Table 9.1. There are some direct linkages. All are linked through the basic measurement tools which each have adopted by mimicking the others - the tonne of carbon dioxide equivalent. The EU ETS is closely connected to the CDM through a linking directive and drives demand for CDM projects. Other emissions trading systems are being designed to link not only vertically to the CDM, but also horizontally to the EU system. The CDM and the voluntary carbon market are linked not only through the companies that operate in both, but through the methodologies for assessing projects and the technical infrastructure that supports them. Other parts of these governance institutions are totally separate; the CDP and the other investor-led mechanisms operate in almost total abstraction from the carbon markets. There are some companies operating in both, but without a linkage between them.

It is also not necessarily the case that the links work towards better governance. The EU ETS-CDM link in some ways weakens the effectiveness of the EU ETS, making it possible for the overall system to have greater actual emissions than the number of allowances that have been handed out. Managers of the EU ETS recognise this problem - a tension between wanting to stimulate a transformation in the European economy towards decarbonisation, and wanting to pursue abatement as cost-effectively (read: cheaply) as possible.

But it is possible to think through ways that the systems of governance could link up. One particular way is the relationship between 'governance by price' and 'governance by disclosure'. At present, a key limit to the CDP (see Chapter 4) and other similar systems is that the member companies are motivated principally by the business risk - rather than other sorts of risk, such as reputation or climate change itself. They want to know what the carbon emissions are of a firm they invest in, because that might become a measure of whether the firm concerned will be more or less profitable in the future. But whether or not this is the case depends on the carbon price, a reasonable certainty that carbon prices will apply generally across the global economy, and that they will steadily rise. So the worldwide spread of emissions trading systems, and the (increasing) stringency of targets that create scarcity in those trading systems, are key to the CDP realising its potential. As yet, the CDP does not affect investor behaviour in any quantifiable way (although there are signs of more diffuse effects in investor culture), principally because the CO2-intensity of a firm is not yet a reliable indicator of the riskiness of the investment. We're back of course here to the problem of the weakness of the targets set by governments. Thinking through this sort of coherence problem is an important element in pursuing more effective climate governance, a point we follow up in the following chapter.

A bigger problem is the coherence between climate governance and the more general governance of the global economy. For example, the World Bank has been a central player in the emergence of carbon markets. But its propensity for large-scale lending for infrastruc-tural projects has meant that ongoing investments in the fossil fuel economy are undermining the Bank's, and everyone else's efforts to bring down global emissions overall. As Ian Tellam puts it; 'While the governments of industrialised countries continue to publicly state their commitment to dealing with the climate issue under the Kyoto Protocol, they continue to work with the World Bank, with multilateral development banks and with export credit agencies to directly or indirectly finance the development of energy systems in low-income countries based on fossil-fuels.'17 The same might be said for trade agreements which, in their current form, are on a 'collision course' with efforts to act on climate change.1 8 We turn to some of these challenges in the final chapter because they are essentially about the overall governance of the economy, which will be critical to whether or not climate capitalism comes about. The very rationale of for whom and for what trade, finance and production are governed would have to change.

17 I. Tellam, (ed.), Fuel for Change: World Bank Energy Policy - Rhetoric and Reality (London: Zed Books, 2000), p. 185.

18 New Economics Foundation, Collision Course: Free Trade's Free Ride on the Global Climate (London: New Economics Foundation, 2003); Peter Newell, 'Fit for governance for whom?

So while there are clearly problems in the way that carbon markets are being governed, it is clear that such governance can be improved, and that well-governed carbon markets might be able to deliver emissions reductions. But the governance of those markets can also be evaluated according to criteria other than just the effectiveness in pursuing emissions reductions. Behind the problems in achieving these reductions are weaknesses in terms of basic political principles such as justice and accountability. To make carbon markets more effective will involve dealing with these issues as well. These are essentially questions of the process of governance - who gets to make the rules, impose them on others, and who has to live with the consequences. This point is worth elaborating, as it underlies the claims about 'carbon colonialism' we saw in the previous chapter.

The core of the justice question is that decisions by large polluters (countries or companies) about whether or not to act on climate change amount to decisions about whether or not to gamble with the lives of poor people that already do, and will increasingly, live with the consequences of climate change. The injustice flows from the fact that those who have contributed least to the problem of climate change will suffer many of its worst effects. It is this situation that animates what has come to be called the climate justice movement.19 Groups that are part of that movement are deeply sceptical about the notion that carbon markets can deliver social and ecological justice.20 A number of these groups met in October 2004 and produced the Durban Declaration on Carbon Trading that stated, 'As representatives of peoples' movements and independent organisations, we reject the claim that carbon trading will halt the climate crisis.'21 Groups signing up to the declaration claim, 'Through this process of creating a new commodity - carbon - the Earth's ability and capacity to support a climate purpose: Towards a development architecture that can deliver', in E. Paluso (ed.), Re-thinking Development in a Carbon-Constrained World: Development Cooperation and Climate Change (Finland: Ministry of Foreign Affairs, 2009), pp. 184-196.

19 P. Newell, 'Climate for change: civil society and the politics of global warming', in M. Glasius, M. Kaldor and H. Anheier (eds.), Global Civil Society Yearbook (London: SAGE, 2005).

20 I. Angus, D. Wall and D. Tanuro, The Global Fight for Climate Justice: Anti-Capitalist Responses to Global Warming and Environmental Destruction (London: IMG publishers, 2009).

21 Durban Declaration, 'Climate Justice Now! The Durban Declaration on Carbon Trading', signed 10 October 2004. Glenmore Centre, Durban, South Africa.

conducive to life and human societies is now passing into the same corporate hands that are destroying the climate.'22

This is not just a problem of inequities between societies, however; great inequalities also exist within societies. National statistics of climate emissions disguise the vast inequalities within countries along the lines of class, gender and race for example in terms of contribution to the problem on the one hand, and vulnerability to its effects on the other. The Indian and Chinese middle class is rapidly approaching levels of energy consumption that rival those of the middle class in Europe or North America, even while the majority of citizens in those countries do not have any access to commercial energy. This means governments face a huge challenge in designing policies and efforts to allocate burden that recognise these vast differences within their populations.

In terms of climate impacts, studies also often fail to identify exactly who will lose. Often it is difficult to speculate beyond the probability that the elderly and the very young suffer more from heat stress, but recent events give us a taste of what we can expect. Hurricane Katrina brought into sharp relief the horror of how environmental change and social inequalities interact to make each other worse. The toxic waste generated by plants located in poorer neighbourhoods in Louisiana, that had been the target of environmental justice activists for decades,23 was rapidly dispersed by the flooding that followed the breaching of the city's walls. The infrastructure to cope with this emergency was just not there. In fact, funding for flood defences in these areas had been cut by the Bush administration. It became abundantly clear that the ability to adapt to climate change is a function of wealth, and in many contexts this closely intertwines with the politics of race.24 Natural disasters become social disasters because poorer people tend to live in flimsier housing, nearer more polluting industry and in neighbourhoods with inadequate infrastructure. Climate change reproduces this tendency for environmental change to magnify existing social inequalities.25

22 Durban Declaration, 'Climate Justice Now! The Durban Declaration on Carbon Trading'.

23 B. Allen, Citizens and Experts in Louisiana's Chemical Corridor Disputes (Cambridge, MA: MIT Press, 2003); S. Lerner, Diamond: A Struggle for Environmental Justice in Louisiana's Chemical Corridor (Cambridge, MA: MIT Press, 2005).

24 B. Parks, and J. Timmons Roberts, 'Globalization, vulnerability to climate change and perceived injustice', Society and Natural Resources, 19 (2006): pp. 337-355.

25 B. Parks and J. Timmons Roberts, 'Globalization, vulnerability to climate change and perceived injustice' pp. 337-355.

Adaptation has also received increasing attention in climate policy debates because of this dynamic. Until recently, many environmentalists have resisted talking about adaptation, fearing it would take attention away from the need to mobilise action on mitigation. But it is now clear we are already committing the planet to an unprecedented level of climate change, which is already starting to produce major disruptions in the livelihoods of the world's poorest people. Justice demands, therefore, that we think about adaptation, and one possibility is to govern carbon markets in such a way as to help finance this. One suggestion is that carbon trading should be taxed to meet the enormous need for new funds to pay for adaptation. Hence, all transactions might be subject to a levy. This already exists in the CDM market, where 2% of the value of all transactions goes to the UN Adaptation Fund. This scheme could be made more general. Other proposals have also been made. The French government under Chirac advocated a tax on flying whose revenues would be used to fund adaptation.26 Such global 'Robin Hood' schemes, taking from the world's airborne elite to pay for impacts on the poor, may provide useful ways of generating funds - despite the irony of tying resourcing for adaptation to an increase in an activity that contributes to climate change in the first place.

So we could imagine governing carbon markets so that they mitigate some of the injustices produced by climate change impacts. It is less clear that this helps decarbonise the economy, however, unless it also leads to the reductions in the amount that wealthy people fly.

And there are distinct limits to how markets can in principle deal with questions of justice. Carbon markets govern, as we showed above, principally through the price of carbon. For their proponents, the logic is that such a carbon price should operate universally, affecting all carbon-emitting activities equally. The mantra of carbon markets is often that the atmosphere doesn't care where the carbon is emitted or which activity it comes from. But from a justice point of view, we absolutely do want to distinguish between different types of emissions. As the late Anil Agarwal of India's Centre for Science and Environment put it: 'Is one tonne of a greenhouse gas produced by a New Yorker or a Londoner equal to a tonne of the same gas produced by a peasant in Guatemala, Chad or Bangladesh? The simple, moral answer is "no". The first tonne is the result of luxury. The second tonne

26 R. Klein and B. Muller, 'Adaptation financing instruments', Policy Brief (2009).

See http://www.oxfordclimatepolicy.org/publications/KigaliPolicyBrief3.pdf.

for basic survival. Both of them go into the atmosphere. But one needs to be controlled and the other needs to be supported.'27 Following this logic, justice requires that we do not attempt to increase the price of carbon for survival activities, only for luxury ones. Governing carbon markets justly, therefore, implies limiting their scope somewhat.

As with the effectiveness question, there is a certain amount of learning involved in governing carbon markets towards more just outcomes. Concerns about the uneven distribution and poor quality of CDM projects have prompted proposals for quota systems to encourage flows to areas currently not receiving them, especially sub-Saha-ran Africa, or to include sectors such as land-use projects where poorer regions are more likely to be attractive hosts. This is exactly the sort of quality control which is required to manage a global system: making sure that, as far as possible, fair play prevails. Governing investment flows to address this imbalance is unlikely to come through the market alone. One way of trying to stimulate particular forms of climate capitalism has been through the multilateral development banks, particularly the World Bank. Because it is funded with public money and operates according to a public mandate - to alleviate poverty - it is able (in principle) to engineer investment flows that deliver a social rather than purely financial return, and to distribute projects more evenly around the world. The Community Development Carbon Fund (CDCF) launched by the World Bank in 2002, with initial capital of $128.6 million, is intended to encourage CDM-like development-focused project funding. It provides financial support to small-scale emission reduction projects through the CDM in the least developed countries and poorest communities within the developing world. The UN's Development Programme (UNDP) has also set up an MDG (Millennium Development Goal) Carbon Facility that seeks to steer investments towards projects which help achieve broader development objectives. Again, emphasising the potential and the perils of getting private finance on board, the scheme is underwritten by Fortin bank, and now faces an uncertain future because the bank has taken a hit in the financial crisis.

conclusions

In order, then, that a response to climate change organised around carbon markets might realise its potential in helping to transform the

27 A. Agarwal, 'Global warming in an unequal world', Equity Watch, 15 November.

See http://www.cseindia.org/campaign/ew/art20001115_2.htm.

global economy, it needs to be well governed. It is by no means clear that such effective governance will emerge, although we have tried to show here that there are signs that it is improving.

Effective governance of carbon markets needs a number of things. First, and most crudely, it needs governments to set strong targets. These create the scarcity in the markets, increase the carbon price, and create incentives for companies to transform their operations away from fossil fuel dependence. Second, it needs rigorous rules for measuring, reporting, monitoring and verifying emissions. Third, those involved in governing offset markets like the CDM need to hold fast against pressure from some carbon market companies to relax rules about the 'additionality' of projects. Without credible claims about additionality, these markets simply become playthings for investors and traders, and more or less useless in responding to climate change. Fourth, if the whole world is to be transformed towards decarbonisation, global markets need to be structured to create incentives and to spread technologies across the world - not just among the rich countries and a few rapidly growing countries in the South like China and India. Fifth, the markets also need to be directed to help with adaptation to climate change, especially for those in particularly vulnerable situations. Finally, the question of who gets to make the rules needs to be addressed - if carbon markets are to achieve their potential, the rule-making needs to be broadened to include more than the small club of currently dominant countries, the carbon traders and a few well-organised international NGOs.

Can we do this? At present, we would have to say it looks fairly unlikely that all these changes will be made. Certainly Copenhagen Accord provides few signs that a new 'grand bargain' will be struck, although progress on some fronts (notably the re-entry of the USA into the multilateral system, and the tightening of targets) is being made. But we need to think through how a well-governed carbon market might emerge in the next few years. In other words, what sorts of climate capitalism could we imagine coming into being? It is to this that we now turn.

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