Carbon Market Crossroads: New Ideas for Harnessing Global Markets to Confront Climate Change

8/23/2019 Carbon Market Crossroads: New Ideas for Harnessing Global Markets to Confront Climate Change

1/44

Carbon Market Crossroads

New Ideas or Harnessing Global Markets to Conront Climate Chan

Nigel Purvis, Samuel Grausz, and Andrew Light April 2013

www.americanprogress.o


2/44

Carbon Market CrossroadsNew Ideas or Harnessing Global Markets

to Conront Climate Change

Nigel Purvis, Samuel Grausz, and Andrew Light April 2013


3/44

Contents 1 Introduction and summary

3 Legacy of global carbon markets

4 Transformational change

11 Carbon-market shortcomings

13 Resolving the legacy

17 Current state of carbon markets

17 Market threats

19 Policy responses

23 The way forward

23 Increase ambition

31 Policy innovation

34 Conclusion

35 About the authors

37 Endnotes


4/44

1 Center or American Progress | Carbon Maret Crossroads

Introduction and summary

Scieniss now believe ha absen a major change o course, he plane will warm

4 degrees Celsius by 2100.1 Climae change on ha scale would rigger severe

economic, environmenal, and social disrupions. Te global communiy would

become more racured and unequal han oday, and human suering on an

unprecedened scale could ensue, according o he World Bank.

Naions are negoiaing in he Unied Naions a new global climae agreemen,

bu ha reay may no ener ino orce unil 2020. While such an agreemen isessenial, he inernaional communiy mus ramp up climae acion nowno

a he end o he decade. Simulaing much sronger climae acion would require

creaing real poliical willa sense o purpose ha simply does no exis oday.

Alhough no a panacea, his repor examines he conribuionsglobal carbon

markesdened here as he buying and selling o climae-change securiies

earned by reducing greenhouse-gas emissions in developing naionscould make

o increasing he worlds ambiion in addressing climae change.

o dae, global carbon markes have played a key role in acceleraing climae

acion while mobilizing billions o dollars in privae-secor invesmen, encourag-

ing economic growh, and helping o alleviae povery. Tese markes have spread

he revoluionary idea ha all counries and communiies bene rom ghing cli-

mae change and ha domesic policies such as pricing carbon make economic

sense. In he process, however, hese markes have ailed in serious ways including

giving credis or quesionable emission reducions and creaing slow and opaque

approval processes ha have been arnished wih apparen conics o ineres.

Te worlds larges carbon markes, moreover, ace severely collapsed prices and a

crisis in condence. Bu hese ailures and crises should no obscure he markes

more imporan legacy and opporuniies or impac.

Wih he righ poliical commimen and much-needed reorms, global carbon

markes have he poenial o deliver ousized environmenal and economic ben-

es in he coming years. o harness hese benes, he inernaional communiy

should ake he ollowing concree acions.


5/44


Over he nex ew pages, we describe he legacy o inernaional carbon markes.

We hen discuss where hose markes are likely o go in he coming years and how

he above-menioned recommendaions can urher make use o inernaional

carbon markes o gh climae change.

TABLE 1

Summary of recommendations

Recommendation Action

1 Emergency climate summit The World Bank and the International Monetary Fund should

convene a meeting o world leaders at the end o 2013 to agree on

new measures to avert a climate catastrophe with a strong emphasis

on using carbon markets.

2 Invest in carbon markets Countries should make a political commitment to increase demand

or global carbon-market credits, either by setting up a market-

stabilization und or by pledging to purchase a minimum quantity o

credits rom developing nations.

3 Responsible energy Countries should ensure responsible development o necessary ossil

uels by carrying through on past pledges to eliminate harmul ossil-

uel subsidiesredirecting some o the revenues to global carbon

marketsand by requiring oil companies to set aside revenues or

drilling in new and high-risk areas to support carbon markets.

4 Strengthen climate goals

through markets

Europe should encourage other countries to take more ambitious

climate action by committing to reduce its emissions 45 percent

below 1990 levels by 2030 and meeting that commitment in part

through global carbon markets.

5 Empower consumers Socially responsible technology entrepreneurs should capitalize

on public concern over climate change by using social media and

innovative online marketing to help consumers directly nance

emission reductions abroad.

6 International carbon market

coordinating body

Countries should establish a new body to encourage prolierating

carbon markets to converge on the same high standards and to help

nations link these markets.

7 Governance reorms Carbon-market regulators should undertake reorms to improve

their credibility, including increasing transparency, creating appeals

mechanisms, streamlining approvals, and adding environmental

saeguards.

8 Learning-by-doing Countries should use carbon markets to enable learning-by-doing bypioneering scaled-up market transactions covering entire economic

sectors rather than small projects only.


6/44


Legacy of global carbon markets

Over he pas decade mos news sories abou inernaional carbon markes have

been excepionally negaive. A 2012 ron-page headline rom Te New York imes

is perhaps ypical: Pros on Carbon Credis Drive Oupu o a Harmul Gas.2

Similar sories alleging raud, ineciency, and conics o ineres in he global

carbon markes have run in Te Wall Street Journal, Te Washington Post, Te

Financial imes, and Te London elegraph.3

No surprisingly, his unatering coverage has led many inormed observers obelieve ha inernaional carbon markes are aally awed and environmenally

damaging. While some o he criicisms have meri, hey obscure a ar more iner-

esing, surprising, and imporan se o ruhs: Inernaional carbon markes have

had an exraordinarily posiive impac on global climae acion, while delivering

imporan susainable-developmen benes or local communiies. Tese markes

represen perhaps he single-mos-imporan policy innovaion since inernaional

climae cooperaion began more han 20 years ago.

Wha drives his gap beween percepion and realiy? Climae policy and carbon

markes have only recenly emerged, and as a consequence, people nd i hard o

place hem in he larger picure. In oher areas o modern lie, where we have more

direc personal experience, we can pu crises in perspecive and call or argeed

responses. We reac o massive home morgage raud, or insance, by demanding

beter regulaion and accounabiliy raher han calling or an end o home mor-

gages. We undersand ha Ponzi schemes and excessive risk aking on Wall Sree

require more ransparency and beter oversigh raher han rejecing nancial mar-

kes alogeher. We undersand he benes o each o hese sysemsha mor-

gages have helped hundreds o people achieve heir dreams o home ownership

and ha uncioning capial markes have spurred economic growh and raisedliving sandards around he world. In oher words, we can place hese scandals in

an appropriae conex. Ye when i comes o innovaive climae soluions such as

inernaional carbon markes, we lack ha broader conex and hereore jump o

unwarraned conclusions.


7/44


For much o he pas decade, global carbon markes have been synonymous wih

he Clean Developmen Mechanism, or CDM. Tis mechanism launched around

2005 wih he Kyoo Proocolhe global legally binding agreemen o emission

reducions nalized in 1997 and reauhorized in December 2012 or anoher eigh

years. Te CDM enables emission-reducion projecs in developing naions o sell

carbon securiies o developed-counry polluers. Under he mechanism, developed-counry purchasers are allowed o ose heir emissions and developing-counry

sellers gain new invesmen, echnologies, and livelihoods. Te CDM has been he

primary global credi issuer wih is credis represening 88 percen o globalcarbon-

marke ransacions in 20044 and 95 percen in 2011.5 Tese gures, o course, don

include larger regional carbon-marke ransacions such as Europes emissions-rading

program. Te remaining balance o global ransacions involves credis rom he oher

smaller carbon markes creaed under he Kyoo Proocol or credis creaed by privae

issuers known as he volunary marke. Tese volunary ransacions are no par o

he Kyoo Proocol and hereore are no subjec o is mandaory emission limis.

Transformational change

Global carbon markes, mos noably he Clean Developmen Mechanism, have

helped o accelerae climae acion around he world. Tey have, moreover, simul-

aneously mobilized billions o dollars in privae-secor invesmen, encouraging

economic growh and helping o alleviae povery. Tese somewha unconven-

ional claims deserve careul analysis.

Accelerating new climate action in developing nations

Inernaional carbon markes have helped developing counries discover heir own

poenial o abae climae polluion, which in urn has encouraged and enabled hese

naions o adop more ambiious climae policies. Te CDM has suppored 6,556

carbon marke projecs and $356 billion in invesmens in emission reducions.6

Tese projecs have helped o creae housands o climae enrepreneurs and elici

millions o dollars in governmen spending on climae policies and beter climae

regulaors. Tese projecs have also rained a much broader group o sakeholdersand communiies o organize around carbon-marke projecs and advocae or emis-

sion reducions. Indeed, each o he 10 developing naions ha paricipaed mos

acively in global carbon markes over he pas decade are oday ou ron experi-

mening wih new, more ambiious climae policies, as illusraed by Figure 1.


8/44


Why is he correlaion beween experience wih he CDM and climae-policy

leadership so srong? o be sure, here was some degree o sel-selecion.

Counries wih he poliical will and capaciy o lead on climae change also had

he abiliy o make he mos ou o he CDM. Ye ha is no he enire sory. By

empowering businesses, governmens, and communiies, carbon markes have

helped o accelerae he imporan acions by hese counries.

FigurE 1

Carbon markets and climate action

Top developing-country carbon market project hosts and their new climate policies

1,000+

100-999

50-99

10-49

1-9

0

Number of CDM projects

Major climate action

Developing a market

Sources: UNEP Risoe Center, Vietnam Bridge, US Climate Action Network, Searle, Helmy7


9/44


China bes demonsraed he posiive ransormaional impac o he Clean

Developmen Mechanism. Afer a cauious beginning, China embraced he CDM

and soon became is larges projec supplieraccouning or 52 percen o hemarke in 2012.8 o dae, China has hosed 3,480 projecs worh $220 billion in

invesmens.9 Te huge volumes o CDM projecs helped Chinese companies

become amiliar wih clean echnologies such as wind power and capuring meh-

ane rom landlls.10 China now has more wind-elecriciy generaion capaciy

TABLE 2

Relationship between carbon-market experience and new climate action

Country

Number

of CDM

projects

Investments

supported ($

billions) Climate action

1 China 3,048 $202.2 Seven municipal and regional emissions-

trading systems are being implemented

covering more emissions than South

Korea.

2 India 1,197 $48.5 Renewable energy and energy- eciency

trading programs were implemented.

3 Brazil 269 $5.4 An emissions-trading system in Sao Paolo

was implemented and a national system

is under consideration.

4 Vietnam 231 $6.4 A national emissions-trading system is

being implemented.

5 Mexico 171 $8.9 National climate law was passed with

potential or a national emissions-trading

system.

6 Malaysia 131 $1.4 A commitment to reduce emission

intensity by 40 percent by 2020 relative to

2005 was made.

7 Indonesia 124 $6.7 A commitment to reduce emissions 41

percent below business as usual by 2020

was made, and an emissions-trading

system is in development with the World

Bank.

8 Thailand 114 $2.0 An emissions-trading system is in

development with the World Bank.

9 South Korea 86 $1.9 A national emissions-trading system

capping 60 percent o emissions is being

implemented.

10 Chile 78 $3.1 A commitment to reduce emissions 20

percent relative to 2007 by 2020 was

made, and an emission-trading system is

in development with the World Bank.

Sources: UNEP Risoe Center, Vietnam Bridge, US Climate Action Network, Searle, Helmy7


10/44


han any counry.11 Te Chinese governmen simulaneously leveraged he CDM

o bolser domesic regulaory capaciy by axing Chinese CDM projecs, raising

$1.5 billion by he end o 2011,12 and hen used he unds o plan and suppor

domesic climae policies. 13 Mos noably, he Chinese governmen developed a

series o sae-sponsored exchanges or CDM credis ha became a basis or learn-

ing abou emissions rading rom U.S. and European parners.

Te Chinese governmen, building on is oundaional experience wih he CDM,

launched a remarkable domesic emission-reducion eor. Te governmen is pilo-

ing seven new sae and municipal emissions-rading sysemsha will collecively

pu a ceiling on more greenhouse-gas emissions han Souh Korea produces and

will represen he second-larges such sysem in he world.14 Te naional carbon

exchanges creaed in hese counries o rade CDM credis will likely oversee pars

o hese new domesic emissions-rading sysems.15 China also announced plans

o use hese local rading sysems as a basis or a larger naional emissions-rading

sysem beginning in 2015.16 Te Chinese governmen also sared requiring domes-ic elecriciy companies o measure and repor heir greenhouse-gas emissions

o he governmen and will soon cap emissions rom nonresidenial buildings in

cerain ciies.17 Excied by hese new markes, many CDM projec developers and

nanciers plan o provide credis o hese new markes.18 A Finish company called

Greensream led he way earlier his monh by purchasing 1.2 million credis rom

he new Chinese markes and announcing plans o purchase 10 imes as many

credis in he nex year. China would no have launched hese policy eors as early

as i did wihou he successul clean-energy businesses, environmenal gains, ax

revenue, and new regulaory capaciy enabled by he CDM.

Experience wih inernaional carbon markes similarly enabled Souh Korea o

accelerae is domesic climae acion. Souh Korea has implemened more han 100

CDM projecs ranging rom solar-elecriciy generaion o landll gas desrucion.

Tese projecs helped Souh Korean indusries, mos noably he large iron and

seel secor, o learn how o improve heir eciency and inves in emission reduc-

ions in oher counries.19 Te Souh Korean governmen has also used he CDM o

improve heir governance capaciies, including expanding he roles o muliple agen-

ciesmos noably he Minisry o Commerce, Indusry, and Energy, he Korean

Emission Reducion Regisry Cener, he Korean Energy Managemen Corporaion,and he Korean Foundaion or Qualiyand creaing wo new unds o inves in

CDM projecs and oher emission-reducion opporuniies.20


11/44


Srenghened by is CDM experience, Souh Korea has underaken signican

new climae acion. I passed a law implemening a naionwide emission-rading

sysem saring in 2015.21 Te sysem will cap 60 percen o Souh Koreas emis-

sions and help enable he couny o mee he goal o reducing emissions by 30

percen relaive o business as usual by 2020 ha i commited o a he climae

alks in Copenhagen in 2009. Souh Korea will also promoe global climaeleadership by hosing he Green Climae Fundhe new nancial mechanism or

unding climae acion ha is being creaed by he inernaional communiyand

by promoing climae acion hrough he Global Green Growh Insiue, a new

inernaional insiuion dedicaed o helping naions enhance economic growh

hrough smar climae policies.

Oher major emerging economies wih CDM experience have also ollowed a

similar pah o urning inernaional carbon-marke paricipaion ino domesic

climae acion. Brazil, he counry wih he hird-mos CDM projecs22 a 269, is

now planning a naional emissions-rading program.23 Te sae o Rio de Janeiro,he source o 14 CDM projecs,24 has implemened a municipal emissions-rading

sysem.25 India, he counry wih he second mos CDM projecs26 a 1,197, has

esablished markes or renewable elecriciy and energy eciency.27 Mexico, he

fh-larges CDM projec sponsor28 wih 171, recenly passed a comprehensive

climae law ha ses a goal o reducing emissions by 30 percen by 2020 and

gives he Mexican governmen he auhoriy o implemen an emissions-rading

sysem. Smaller carbon-marke paricipans, including Belarus, Chile, Colombia,

Cosa Rica, Indonesia, and Jordan, have parnered wih he World Bank and he

European Union o begin developing heir own emissions-rading sysems.29

Over he pas decade global carbon markes have helped o ransorm he geopoli-

ics o climae change by changing he way developing naions hink abou climae

acion. Developing counries have long seen climae change as a problem caused

by developed counries and as such requiring a soluion by hese counries. Global

carbon markes, however, have changed he mindse o developing counry commu-

niies, businesses, and governmens by helping hem gain he capaciy o ake acion

agains heir own emissions and insilling an undersanding ha well-designed

climae policies can help atrac oreign invesmen, creae jobs, and simulae

economic growh. In oher words, he CDM demonsraed o developing naionsha climae acion could advance naional and local goals. In ac, he CDM on he

whole proved hugely popular wih developing counry governmens, enrepreneurs,

and communiies. Tis shif in hinking helped o produce numerous new policies

Over the past

decade globa

carbon marke

have helped t

transform the

geopolitics of

climate chang

by changing t

way developin

nations think

about climate

action.


12/44


and programs in developing counries as well as he new global poliical consensus

ha all naions need o ake naionally appropriae climae acion, raher han jus

developed naions. Conribuing o his new hinking represens perhaps he single-

larges accomplishmen o global carbon markes o dae.

Promoting sustainable development

Inernaional carbon markes have also spurred economic growh and povery alle-

viaion in developing naions. Carbon markes allow businesses o inves in people

who wan o gh climae change in he same way ha a sock marke allows indi-

viduals o inves in companies, and he nonpro Kiva.org enables individuals o give

microloans o enrepreneurs in developing counries, and he crowdunding pla-

orm Kicksarer permis people o suppor business endeavors around he world.

Over he pas decade hese invesmens encouraged oher invesmens, creaed

jobs, grew incomes, and suppored new enrepreneurship. Te sale o he 2.4 billionCDM credis issued hus ar, as described above, has generaed billions o dollars

in revenues or businesses in developing counries and $356 billion in supporing

invesmens.30 Tese invesmens have generaed even more in local economic aciv-

iy by providing jobs and wages ha bene local businesses.

Te Clean Developmen Mechanism, moreover, has helped o improve human

healh and well-being in developing counries by sponsoring benecial projecs.31

Many carbon-marke clean energy projecs increased access o elecriciy in rural

areas and, by displacing oher dirier sources o elecriciy, improved local air

qualiy.32 CDM-suppored projecs o capure wase gases rom landlls reduced

he risk o he polluans in hose gases leaching ino waer supplies. In a recen

survey o 202 random CDM projecs prepared or he Unied Naions, 66 percen

o hese projecs sough o improve local air qualiy, 52 percen ried o conserve

local naural resources, and 46 percen sough o improve wase managemen.33

Global carbon markes have also improved lives by diusing clean echnologies. A

quarer o all CDM projecs o dae have spread new echnologies and knowhow

o developing counries.34 An Irish company, or example, provided he echnol-

ogy o recover wase gases rom landlls, dairy arms, and catle ranches acrossBrazil and Mexico.35 Spanish and Danish companies provide many o he wind

urbines used o generae clean energy in China.36 Tis spread o echnology

can help lower he cos o reducing emission and encourage he developmen o

domesic indusries.


13/44


Te inernaional communiy and developing counry governmens in paricu-

lar have in urn leveraged carbon markes o nance urher climae acion. Te

Unied Naions levied a 2 percen ax on all CDM credis and direced he revenue

ino an inernaionally managed und o help leas developed naions adap o cli-

mae change, collecing $324 million by early 2013.37 Te und suppored projecs

such as a $4.2 million eor o preven he desrucion o valuable agriculuralland in Argenina by helping local armers o beter manage heir waer and an

$8.6 million eor o help local communiies in Senegal adap o rising sea levels.38

Individual developing counries, mos noably China as described above, also

levied heir own carbon-marke axes. China used he revenues rom is ax o sup-

por many aciviies including a naional sudy on he impac o climae change on

China and how he counry can prepare.39

Cost savings in developed nations

Global carbon markes have made reducing emissions much more aordable or

developed naions, saving hem a leas $3.6 billion since 2008. Te cos o reduc-

ing emissions rom CDM was $1.30 o $6.50 less han alernaive emission reduc-

ion opporuniies in he EU Emissions rading Sysem, or EShe carbon

marke ha caps emissions or mos o Europerom 2008 o 2011.40 European

companies saved a leas $1.5 billion over he same period by purchasing hese

credis raher han reducing heir own emissions. Similarly, Japanese companies,

which also purchased CDM credis o ose heir emissions, saved a leas $2.1

billion. Furher, CDM credis reduced prices in markes such as he EU Emissions

rading Sysem by allowing developed-counry emiters o avoid making more

expensive emission reducions, saving companies and governmens even more

money hen ound by he above esimaes.

Creating political will for climate action in developed nations

Te cos savings rom inernaional carbon markes have enabled developed

counries o pursue ar more ambiious emission-reducion policies han would

have occurred oherwise. In general, carbon markes, by giving businesses cheaperopions or reducing heir emissions, make aggressive policies more poliically

palaable or businesses and he elecorae. Carbon markes also reduce he hrea

o wild price swings, a comor o risk-averse voers and businesses.


14/44


Te 1997 Kyoo conerence oers concree proo o carbon markes impac on

ambiion. In exchange or including he Clean Developmen Mechanism in he

Kyoo Proocol, mos developed naions agreed o more ambiious emission-reduc-

ion arges. Japan, or example, saed publicly ha he CDM allowed i o commi

o sronger emission-reducion goals. Te lead U.S. climae negoiaor a he ime

Su Eizensa esied o Congress ha he Unied Saes would no have agreed oany emission reducions a Kyoo wihou he CDM.41 In 2009 he European Union

oered o increase is Kyoo emission-reducion arge rom 20 percen o 30 per-

cen in exchange or oher naions aking on ambiious arges and said ha i would

achieve mos o he addiional miigaion hrough global carbon markes.42

Many privae companies, including Dell, Google, HSBC, and PepsiCo, and a num-

ber o universiies and oher insiuions also made volunary pledges o reduce

heir emissions ha depended heavily on inernaional carbon markes.43 Google

alone purchased $15 million worh o carbon oses, enough o help make he

company carbon neural.44 Tough small compared o governmen commimens,hese privae-secor acions have he poenial o help shif business perspecives

on climae acion, eiher because hey discover business opporuniies or because

hey learn ha miigaion coss are manageable.

Carbon-market shortcomings

Despie many imporan accomplishmens, inernaional carbon markes have

also ailed in a number o signican and highly visible ways. On several occa-

sions marke regulaors have given credis or quesionable emission reducions,

ceriying a number o projecs as environmenally benecial when hey migh

have occurred wihou he carbon-marke suppor. Te regulaors also creaed a

slow and opaque approval processes ha has been arnished by apparen conics

o ineres. Tese ailures, described in more deail below, have undersandably

eroded public condence in inernaional carbon markes.

Environmental impact

Early inernaional carbon markes may have given credis or quesionable emis-

sion reducions, mos noably or desroying sockpiles o cerain climae damag-

ing air condiioning coolans known as HFC-23.45 Te CDM gave a large number

o credis47 percen o credis issued o dae46or hese projecs because o


15/44


he gass ousized impac on global warming and because he desrucion o he

gas could clearly be shown o resul rom carbon markesdesroying he gas

produced no oher revenue. Knowing his, a number o coolan-producion plans

may have increased producion o he gas only o receive paymens rom carbon

markes or desroying he unnecessary sockpiles ha hey produced. I remains

unclear how many o he issued credis were arnished by his marke manipula-ion, and boh he CDM regulaors and CDM-credi buyers in Europe have aken

seps o end his abusive pracice. Regardless, he aair remains a serious black eye

or global carbon markes.

Global carbon markes also may have creaed oher quesionable carbon

securiies relaing o hydro, wind, and oher renewable-elecriciy projecs.

Renewable-energy projecs have produced 17 percen o CDM credis so ar

and are orecased o increase heir share o 45 percen by 2020.47 Many o hese

renewable-energy projecs derived only a small porion o heir revenue rom

CDM credis, relied on widely available echnologies, and received signicanaddiional governmenal suppor hrough ax credis and subsidies. Tese acors

may indicae ha some o hese projecs were buil wihou he suppor o he

CDM. Wheher ha is knowable or even maters is debaable, and expers remain

divided abou wheher hese projecs should have been approved.

Governance

When he Clean Developmen Mechanism began, global carbon rading was brand

new. Wihou pas experience and applicable models or success a he global level,

he CDM suered rom a long lis o regulaory ailures in is early years. Iniially,

is regulaors were hopelessly slow, inecien, opaque, and seemingly poliically

biased. Te governing body o he CDM involved isel in almos all decisions, slow-

ing he average ime required or projec approvals o 800 days a heir wors in lae

2008mos decidedly no moving a he speed o business.48 Te dicul process

and long delays signicanly increased he cos o regisering early projecs wih

he CDM, helping o creae ransacion coss o $0.06 o $0.47 per on o emission

reducions or a number o early projecs in India.49 Te ransacion coss posed

larger barriers or leas developed counries, which lacked he capaciy o navigaehe complex bureaucracy o he CDM and had ewer opporuniies o reduce emis-

sions.50 Members o he CDM governing body, moreover, simulaneously served as

climae-reay negoiaors or heir counries and represenaives o heir counrys

Renewable-

energy projec

have produce

17 percent of

CDM credits

so far and are

forecasted to

increase their

share to 45

percent by 20


16/44


CDM regulaor, creaing a high poenial or conics o ineres.51 Te CDM gov-

erning body also ailed o ollow consisen writen guidelines, ofen making ad hoc

decisions and breeding uncerainy among invesors.52 On op o all o his, many

meeings o he CDM leadership occurred behind closed doors, and no appeals

mechanism exised o challenge board decisions.

Sustainable development

Some global carbon-marke projecs also may have harmed he local environ-

men and communiies. Criics allege, among many hings, ha he CDM has

encouraged he consrucion o large hydroelecric power plans ha harmed local

ecosysems, displaced communiies, and damaged local waer qualiy.53 Oher

sakeholders argue ha CDM projecs o collec landll mehane have desroyed

he livelihoods o communiies o garbage pickers who depend on local dumps.

Mos horribly, owners o a CDM accredied palm-oil planaion in Hondurasallegedly massacred 23 armers in a land dispue.54 Tese ailures, wheher he

CDM could have prevened hem or no, y in he ace o one o he win objec-

ives o he CDM o promoe susainable developmen.

Effect of criticisms

Tese criicisms have harmed he credibiliy o inernaional carbon markes and

deerred naions rom conribuing o heir growh. Parly in response o hese

criicisms, some counries have placed limis on he ype and number o inerna-

ional carbon-marke credis ha hey will allow ino heir domesic markes. As

o 2013 he European Union no longer acceps credis rom projecs o eliminae

cerain gases wih large global warming impacs such as HFC-23 and N2O and

rom projecs in middle-income counries including China ha were regisered

wih he CDM afer 2012.55 Caliornia, as described above, did no allow CDM

credis and does no plan o allow any inernaional credis or he rs ew years

o is program.56 Likewise, Souh Korea disallowed any inernaional oses or

he rs ve years o is new emissions-rading sysem and will only allow inerna-

ional oses o mee 10 percen o demand during he nex ve years.57


17/44


Resolving the legacy

Te ailures o global carbon markes, hough serious a rs, are easy o oversae.

Tese shorcomings should no obscure he ar more imporan benes o carbon

markes or he climae.

Positive environmental impacts

While being oo lenien in one respec by issuing more credis han environmen-

ally jusied, global carbon markes were also oo sringen in oher ways. Many

projecs caused more emission reducions han raders were allowed o sell and

his buer makes up in par or some o he more quesionable projecs. Aware o

he risks posed by seting up he rs major carbon-marke issuer, he CDM regula-

ors consciously used conservaive assumpions in calculaing how many credis o

give each projec. Te rules on mehane-aring projecs, or example, require lowesimaes or how much mehane he projecs desroy. In response o criicisms,

in anoher example, he CDM lowered he limi on he number o credis ha he

much maligned coolan projecs could receive. Moreover, he CDM generally only

gave credis o any given projec or a period o seven years. Tese projecs, however,

creaed power plans and mehane-capure sysems ha could coninue o operae

proably and reduce emissions or many years ino he uure.

Independen analysis suggess ha he ailures by he CDM o police agains ake

credis and he conservaive rules o he CDM may have had similar environ-

menal impacs, eecively oseting each oher. ogeher, all he environmen-

al ailures cied by criics would invalidae abou 62 percen o exising CDM

credis.58 Te combined eec o all he conservaive decisions and sandards

made by CDM would have caused he CDM o supply 55 percen oo ew credis.

Admitedly, knowing he acual environmenal impac o he CDM is impossible,

bu he prevailing narraive ha CDM caused signican environmenal harm is

mos likely wrong.

Governance reforms

Te regulaors o inernaional carbon markes have also already come a long way

in improving heir perormance. Te CDM regulaors responded o criicisms by

sreamlining projec approvals, improving inernal and exernal communicaion,


18/44


consolidaing and ormalizing rules, and sandardizing projec approval pro-

cesses.59 Reecing on some o hese posiive changes, he lengh o ime needed

o review a ypical projec ell o 200 days in lae 201160a 75 percen reduc-

ion. Sakeholders now widely acknowledge ha he managemen o he CDM is

improved.61 More reorms are needed, bu i is only air o acknowledge ha he

CDM is no longer he adminisraive nighmare i once was.

TABLE 3

Challenges faced by important markets

Market

Crises and

governance failures Reforms Current status and value

Stock markets Major bubbles and

crashes

Extensive national

and international

regulations

$55 trillion in global capital

that orms the backbone o the

global economy

Agricultural

utures

Destructive price

manipulation

Disclosure requirements

and trading limits

Key nancing tool o armers

traded on multiple exchangesacross the world

Home

mortgages

Excess lending and

oreclosures

Lending standards $9.5 tril lion in U.S. capital that

enables millions o borrowers

to own homes

SO2 trading

program

Excess prots or

polluters

Tightening standards

to urther reduce

emissions

Caused dramatic reductions in

acid rain at low costs

Sources: Bloomberg,62 Freddie Mac63

Carbon market failures in context

Te successes and ailures o inernaional carbon markes mirrored hose o many

emerging markes beore hem. All markes, especially nancial markes, ace

crises and governance ailures as hey adap o innovaion and changed poliical

circumsances. Regulaors coninuously respond wih reorms o address he bur-

geoning challenges. Despie his back and orh, securiies markes play vial roles

in supporing he global economy and meeing peoples needs. able 3 provides a

number o examples o nancial markes ha have experienced major urmoil bu

noneheless are widely acceped as being benecial.

Sock markes provide a prime example o he challenging bu essenial role o

markes. Sock markes have experienced bubbles and crashes as exuberan inves-

ors run up prices and ee bad invesmens. Regulaors have responded o such


19/44


volailiy by requiring raders o disclose more inormaion and resricing he size

o heir bes. In he meanime, sock markes became he $55 rillion backbone

o he global economy, helping new companies raise money and invesors gain

wealh. Te same is rue o markes or agriculural uures ha allow armers and

ood processors o insure hemselves agains swings in ood prices. Similarly, SO2

emissions credispermis ha limi emissions o he polluans rom coal-redpower plans ha cause acid rainhave proven heir worh.

Te CDM was creaed as a learning-by-doing mechanism. Counries hoped he

CDM would help hem harness he creaiviy and energy o he privae secor o

reduce emissions a low coss and in ways ha promoed susainable developmen.

Privae invesors and heir local governmen parners were given wide laiude o

experimen wih a broad range o projecs and secors. Unsurprisingly, his experi-

men, like mos experimens, produced successes and ailures. Te imporan

hing o bear in mind is ha he CDM buil a oundaion o valuable knowledge

and capaciy upon which he world can build a new wave o carbon markes haproduce many more successes han ailures. Te CDM has come a long way in is

less-han-10-year hisory, probably ar urher han many oher nancial markes

have over a similar period o ime. Wih any luck, he CDM will some day be seen

as he prooype ha enabled uure success a a ar larger scale.


20/44


Current state of carbon markets

Market threats

Market proliferation

Inernaional carbon markes hrough heir successes and ailures alike have

already helped o pave he way or a second generaion o carbon markes. Japanhas announced plans or is Bilaeral Ose Credi Mechanism, or BOCM, which

will help Japan mee is ousanding climae commimens and creae expor

markes or Japanese companies.64 In 2012 Caliornia launched is own marke o

provide oses or is new saewide emissions-rading sysem. Meanwhile, China

recenly laid down guidelines or a carbon marke o suppor is new municipal

and provincial emissions-rading sysems.65 Tese new markes reec in par

he ailure o he original carbon markes because counries developed heir own

insiuions insead o rusing he Clean Developmen Mechanism. Tey also

demonsrae he success o exising markes, which blazed he poliical rail and

underook he inellecual heavy lifing ha made hese new markes possible.

Te prolieraion o new markes presens a number o challenges. Each o hese

markes will likely develop unique sysems and rules, racuring he global sysem

and making i harder or businesses o rus he plehora o credis and operae

under he regulaory pachwork governing hese various markes. Moreover, he

new markes could creae compeiion ha would cause he lowering o envi-

ronmenal sandards in an eor o atrac new projecsa race o he botom.

Te compeing counries migh urher respond by obscuring he environmenal

weakness o heir individual mechanisms, reducing ransparency and causing evenmore harm o he credibiliy o he global carbon-marke sysem.

Properly managed, however, he prolieraion o carbon markes could be an

incredible opporuniy. Te individual markes could beter mee he individual


21/44


poliical and economic needs o heir hos counries. Tey could also ake some

pressure o he srained CDM. Moreover, he compeiion beween markes

could moivae new innovaion and lead o more cos-eecive and environmen-

ally benecial markes. Encouraging his consrucive prolieraion, however,

would require careul guidance by he inernaional communiy.

Price collapse

Despie heir success in driving climae acion and acceleraing economic growh,

he original inernaional carbon markes now ace a price collapse ha hreaens

heir viabiliy. CDM credi prices have declined seeply in recen years, alling

rom $20 a he end o 2008 o less han $5 a he end o 2012 and down o 44

cens oday, as shown in Figure 2.66 Te declining prices likely resul rom a pro-

jeced sagnaion in demand and an explosion o

supply. Annual demand or inernaional carbonmarke credis, which sood a 319 million

credis in 2011,67 could rise o 330 million by

2015, 520 million by 2020, and decline o 500

million hereafer.68 Annual supply, meanwhile,

which sood a 308 million credis in 2011,69

could explode o 1.1 billion by 2015, 2.1 bil-

lion by 2020, and 2.3 billion hereafer.70 Te

low prices undermine incenives o inves in

uure emission-reducion projecs, limiing he

benecial reach o carbon markes. Over ime

he price collapse will urher damage he image

o carbon markes and lead more counries and

businesses o orgo allowing or purchasing he

credis, urher weakening demand.

Counries caused his dearh o uure demand

by ailing o pursue sucien emission reduc-

ions and o make use o he exising global

carbon markes. Only Europe and Japan purchase signican quaniies o iner-naional credis,72 and Japan may swich o purchasing credis hrough is own car-

bon marke in he no oo disan uure.73 Mos o he governmen planning or

new signican emission reducions hrough markesChina, Souh Korea, and

he sae o Caliorniado no plan o allow many, i any, inernaional credis.

FigurE 2

Historical CDM credit prices

0

5

10

15

20

25

Aug. 11

2008

Aug. 11

2009

Aug. 11

2010

Aug. 11

2011

Aug. 11

2012

Source: Thompson Reuters Point Carbon71


22/44


Wihou a signican shif by counries, global

carbon markes will ace depressed prices or

many years, hreaening heir viabiliy.

Tarnished reputation

Exising carbon markes also ace a serious

credibiliy challenge. Te highly visible environ-

menal, regulaory, and susainable developmen

ailures described earlier have arnished he repu-

aion o he CDM. Counries ace pressure rom

environmenal advocaes o rejec he CDM and

carbon markes in general in avor o more expen-

sive emission reducions a home. Tis pressure

conribued o he decisions by counries o scaleback or disallow he use o CDM credis in heir

markes. In response, he CDM has underaken

signican reorms as previously described, bu

hese have so ar ailed o sucienly improve is poor repuaion.

Policy responses

European efforts

Europe, he larges source o demand or inernaional carbon markes, aces a

similar crisis. Te EU Emissions rading Sysem credi prices peaked in 2008 a

around $43 and seadily declined o abou $10 by he end o 2011, now sanding

a approximaely $4.75 Te low prices resul rom a number o acors including he

global recession in 2008 and he coninuing European nancial crisis ha lowered

economic oupu and also emissions.76 Te low prices also resul rom ambiious

European policies such as incenives or renewable-elecriciy generaion and

energy-eciency sandards or buildings and auomobiles, which urher reducedemissions. Te lower-han-expeced emissions make complying wih he EU carbon

arges easier or companies and hereby lowers EU and global carbon-credi prices.

FigurE 3

Future trends in international carbon marketdemand and supply

0

0.5

1

1.5

2

2.5

2013 2015 2017 2019 2021 2023

Supply

Deman

Source: Michaelowa 201274


23/44


Te European Commission pu orward a proposal ha would have back-loaded

or delayed he aucion o a large number o credis900 million credis rom

2013 o 2015 or 15 percen o he credis i plans o issue over hose years77unil

afer 2015.78 Tis would have increased credi prices and encouraged Europeans

o buy more inernaional oses. In April 2013 he European Parliamen, how-

ever, rejeced he proposal by a narrow margin.79

Te parliamens voe does nosignal he end o he reorms as he European Commission could marshal suppor

and pu orward a new version o he proposal in he monhs ahead. Te ailure,

however, symbolizes Europes curren inabiliy o moun he domesic leadership

needed o press or sronger inernaional acion.

New global mechanisms

Counries also ace crucial decisions on wo new carbon-marke eniies. In 2011

naions agreed in global climae alks o creae wo new marke mechanisms. Ters, deemed he New Marke Mechanism, would be a carbon markesimilar

o he CDM in his respec onlyha could ceriy emission-reducion credis

rom developing naions or use by oher counries. Te New Marke Mechanism

would likely include a secoral-crediing sysem, seting baselines or naional eco-

nomic secors such as elecriciy generaion, cemen manuacuring, or oresry,

and providing credis i he counry beas he baseline. Tis would mos impor-

anly enable counries o receive credis or heir climae policies. Te second

poenial marke eniy, wih he somewha odd name o Framework or Various

Approaches, would speciy minimum sandards or local, naional, and regional

carbon markes and oher climae policies, as well as enable counries o compare

he impac o dieren policies, among oher hings.

Boh mechanisms, however, remain largely undened. Naions in 2011 did no

speciy many deails abou eiher mechanism. In 2012 counries agreed o dene he

srucure and rules or he New Marke Mechanism during 2013. Lacking clariy on

he inen o he Framework or Various Approaches, naions also decided o creae a

similar one-year process o dene a purpose and scope or ha policy vehicle.80

Tese new carbon markes represen imporan opporuniies o encourageemission reducions around he world. Te secoral crediing o he New Marke

Mechanism could increase he scale o emission reducions dramaically and

enable developing counries o become amiliar wih how o implemen compre-


24/44


hensive naional climae policies. Te Framework or Various Approaches could

raise sandards or carbon markes while allowing counries o pursue he bes

policy pahs o reduce heir emissions.

Clean Development Mechanism reforms

Counries are also considering a number o reorms o address many o he

governance ailures regarding inernaional carbon markes. Te Unied Naions

brough ogeher a high-level panel in early 2012 o review he successes and

ailures o he CDM and propose new reorms. Te panel pu orward a number o

proposals ha would address many o he remaining governance challenges ha

sill plague he CDM. 81

Te panel called or changes in he role and srucure o he CDM regulaors o

improve heir perormance. Te suggesions included encouraging he governingbody o he CDM o spend less ime dealing wih echnical issues and more ime

addressing higher-level sraegic quesions. Te panel encouraged he governing

body o delegae he echnical responsibiliies o is sa and develop perormance

merics o evaluae is sa. Te panel also proposed changes o he makeup o he

CDM leadership, including requiring members o be chosen based on echnical

knowledge raher han regional aliaion.

Te panel also suppored a plan o develop an appeals mechanism o handle

complains agains he CDM regulaors. Under he curren sysem sakeholders

have no recourse oher han asking counries o raise he issues a he annual cli-

mae alks. Te panel proposed creaing an appeals mechanism wih he power o

overrule procedural decisions made by he CDM regulaors. Separaely, he panel

proposed a grievance mechanism or local sakeholders o address local environ-

menal and social concerns wih specic CDM projecs.

Te high-level panel urher oulined a number o proposals o improve he

environmenal impac o he CDM. Tis included suggesing ha he CDM

sandardize he way i measures and evaluaes emission reducions and use even

more conservaive assumpions o reduce he number o credis given o ques-ionable projecs. Te panel recommended creaing wha hey ermed posiive

liss whereby projecs meeing cerain high sandards would receive auomaic

approval. Tis would encourage more projecs wih sronger environmenal

inegriy. Te panel urher recommended creaing incenives o encourage new


25/44


projecs o ake advanage o new echnologies, o accelerae echnological devel-

opmen and emission reducions.

Te panel oulined many oher reorms o enhance he economic benes o

projecs or local communiies: increase he posiive indirec impacs or he

local environmen; encourage more projecs rom underrepresened regions; andsreamline he approval process. Te governing body o he CDM is now review-

ing he panels recommendaions and deciding which ones o implemen. Tese

reorms, hough no a cure o all problems, would go a long way oward addressing

he wors criicisms o exising carbon markes.

Te U.N. panel is no he only source o poenial reorm or he CDM. Te

Unied Naions has requenly asked CDM marke paricipans o propose

reorms. A recen soliciaion atraced 171 repors suggesing various improve-

mens o he CDM.82 Te remendous response indicaes no only he possibiliy

or reorm bu also he coninuing ineres in seeing he CDM improve.


26/44


The way forward

Curren naional acions o comba climae change all well shor o wha is

needed o preven unaccepable risks o caasrophic climae change. Scieniss

agree ha he world is producing ar oo much climae polluion o keep global

emperaure increases a 2 degrees Celsius over preindusrial levels by 2100he

generally acceped upper hreshold or wha scieniss consider sae.83 In ac, hey

hink he world is on rack or 4 degrees o warming.Tis horrible scenario would

cause more requen and severe hea waves, render much cropland unusable

wih esimaes as high as 35 percen in Arica, and reverse decades o economicdevelopmen in he worlds poores counries.84 Te developed world would no

be spared, wih he Unied Saes acing more exreme sorms, more droughs

decimaing is agriculure, and higher risks o diseases.85 Such shifs would be

beyond he abiliy o human socieies o simply adap and could conribue o

mass migraions and geopoliical insabiliy.

Inernaional carbon markes have provided a rare brigh spo by conribuing o a

sronger global culure in suppor o climae acion. Te original markes, however,

now ace crises ha hreaen heir uure viabiliy. Counries, businesses, and con-

sumers could use carbon markes o cos-eecively ake aggressive acion and help

preven caasrophic climae change. New poliical will and commimen o harness

he power o hese markes is essenial. Tis new invesmen in urn would reinorce

exising carbon markes and creae a solid oundaion or heir coninued success.

Increase ambition

Leader-level summit

Te world needs o convene an emergency summi on climae acion o help accel-

erae measures o aver massive climae change. We canno aord o wai unil

2015he earlies ime when global climae negoiaions migh involve world


27/44


leadersnor is he Unied Naions negoiaing orum necessarily he bes vehicle

or agreeing on concree climae acions and invesmens raher han reay commi-

mens. A lae 2013 summi o world leaders could be buil around he urgen need

o ramp up acions, highlighing climae inervenions such as carbon markes ha

also srenghen economic growh and reduce economic and environmenal vulner-

abiliy. Te summi would creae a plaorm or naions and inernaional insiuionso expand exising collaboraion and explore new parnerships, promoe bes-pracice

climae policies, and announce new domesic and mulilaeral climae commimens.

Such summis enable leaders o look beyond shor-erm necessiies and reach agree-

mens ha proec uure generaions. Te las ime counries convened such a leader-

level summi was a Copenhagen in 2009. Ta meeing, or all o is aws, orced

world leaders o conron climae change and elicied signican new commimens

o reduce climae polluion. Te summi proposed here could go much urher han

Copenhagen as i would no be consrained by he exising climae agreemens and

reay negoiaions and, as he name suggess, would ocus on angible acions. TeWorld Bank under is curren presiden Jim Yong Kim and his new public commi-

men o climae acionas well as he banks saus as a leading global orum ocused

on economic developmenwould be well posiioned o convene such a summi. In

his eor he World Bank could parner wih he Inernaional Moneary Fund, or

IMF, and is curren chie Chrisine Lagarde, a reliable climae champion, and U.N.

Secreary General Ban Ki-moon, who has campaigned irelessly or climae acion.

Agreemens reached a his summi could eed ino he major ocial climae negoia-

ions planned or 2015, helping o pave he way or a uure climae reay.

Te summi could include an imporan role or privae-secor leaders and pursue

launching public-privae parnerships as one o is key goals. A he conerence

global business leaders could emphasize he imporance o predicable and srong

public policies and make commimens o new climae-riendly invesmens sub-

jec o enacmen o such policies. World leaders could respond o hese privae-

secor calls or acion and commimens hrough policies ha suppor businesses

including invesmens in carbon markes.

Invest in carbon markets

Counries should deliver on new pledges o ramp up climae acion agreed o in he

proposed summi signicanly by increasing demand or inernaional carbon cred-

is. Tere are several reasonable ways o do his. Naions could creae a new global

A late 2013

summit of woleaders could

built around th

urgent need to

ramp up actio

highlighting

climate

interventions

such as carbon

markets that

also strengthe

economic gro

and reduce

economic and

environmenta

vulnerability.


28/44


carbon bank o nance emission reducions in developing naions. Te bank could

have a global saus analogous o he IMF and he World Bank and be housed in or

have branch oces in Beijing or Washingon, D.C.86 Anoher opion would be or

exising inernaional insiuions, perhaps primarily he World Bank, o esablish a

bridge und ha would buy CDM and oher global carbon-marke credis o resore

he balance o carbon marke supply and demand unil carbon prices in Europe,Caliornia, Ausralia, and elsewhere rise again as hey are expeced o do over ime. A

hird opion would be or he inernaional communiy o direc he Green Climae

Fundhe new climae-nance vehicle arising ou o global climae alkso pur-

chase global carbon-marke credis, among oher asks.

A nal opion would be or major economies o agree, perhaps in he G20 or G8,

o arges or nancing emission reducions in developing naions, leaving each

naion o decide how bes o implemen is commimenha is, a collecive

pledge o purchase a minimum number o emission reducions hrough global car-

bon markes. o ulll heir share o such a pledge, he EU naions migh chooseo use heir emission-rading sysem. While no a G-20 member, Norway migh

use public unds hrough governmen-o-governmen cash-on-delivery bilaeral

deals o do is share, as i has done in he pas. Te Unied Saes migh rely on

carbon-marke purchases rom Caliornia supplemened by new resources rom

Washingon, D.C., whenever easible. Many counries would look o inernaional

carbon markes, wih heir ease o access, o mee heir goals. In addiion o ex-

ibiliy, he opion o a collecive global goal or carbon-marke suppor obviaes

he need or governmens o hand over new unding o a mulilaeral insiuion.

TABLE 4

Options for investing in global carbon markets

Proposal Description

1 New carbon market bank New multilateral institution to nance emission reductions in

developing countries through carbon markets

2 New carbon market und New und within the World Bank or other existing institution to

support international carbon markets

3 Scaled-up Green Climate Fund Support and direct the Green Climate Fund to strengthen

international carbon markets.

4 International emission-reductionnancing targets

New commitments by countries to nance emission reductionsin developing countries through international carbon markets

and other means.


29/44


Each o hese ideas could work and deserves serious consideraion. Tey each have as

heir goal a public-privae parnership in which he governmen aciliaes expanded

demand or carbon markes and he privae secor nds ways o lower coss and

explores innovaive ways o gh climae change. Te imporan hing is ha naions

pick an approach and implemen i aggressively. Te bigges obsacle o any o hese

ideas, o course, is he poliical will needed o raise he necessary resources o increasedemand or inernaional carbon-marke credis. Counries could bes overcome

his barrier by agreeing o one or more o hese approaches in he ype o leader-level

summi described above. Only such a global resoluion, aken among all he major

emiters, could creae he necessary leadership and resolve required.

Responsible energy

Te world coninues is decades-long rend o producing more ossil uels. Global

oil producion rose 12 percen rom 2003 o 2012, and naural gas producionrose 26 percen.87 Producion in he Unied Saes rose even more over he same

period27 percen or oil and 26 percen or gaspushing he counry slowly

oward becoming an oil and gas exporer.88 Tis new producion added o he oil

and gas indusrys ousized pros wih ExxonMobil making $44.9 billion in 2012,

jus shor o is all-ime record se in 2008 beore he global recession.89 Despie

heir success, ossil-uel companies coninue o receive signican subsidies rom

cash-srapped governmens. In ac, a a ime when many counries ace high

unemploymen and major budge decis, governmens are direcly subsidizing

ossil-uel producion and consumpion o he une o $480 billion a year.90 aking

ino accoun he harm o hese ossil uels o sociey hrough global warming, he

world provides a $2 rillion subsidy or ossil uels, wih he Unied Saes leading

all oher counries a $502 billion.

Much o he new oil and gas producion, having exhaused he easily accessible

supplies, carries wih i he hrea o poenially large environmenal harm beyond

climae change. Hydraulic racuring, or example, can hreaen local waer sup-

plies, and ar sands require he desrucion o millions o acres o oress. Oher

producion is occurring in high-risk areas ha are dicul or emergency respond-

ers o reach in case o spills or oher disaser, such as he deep waers o he Gul oMexico, as demonsraed by he Deepwaer Horizon oil spill in 2010. Te same is

rue o he ragile and remoe Arcic Ocean ha is experiencing a boom in oil and

gas drilling and exploraion.


30/44


Fossil uels will remain a realiy in he near erm as he world canno ransiion

overnigh o renewable energy and elecric cars. Leaders o he worlds major

economies, however, should accelerae heir eors o phase ou ossil uels and

use carbon markes o help ensure ha he necessary ossil uels are responsibly

developed. World leaders should sar by making good on heir commimen a

he G-20 meeing in Pitsburgh in 2009 o end harmul ossil-uel subsidies andshould redirec a porion o hose revenues o urher reduce emissions hrough

global carbon markes. In addiion, when ossil-uel producion has overly large

environmenal impacs or occurs in high-risk areas, counries should work wih

companies o encourage hem o dedicae a porion o heir revenue o miigaing

he environmenal damage. Tis could include having companies purchase credis

rom inernaional carbon-marke projecs ha boh reduce emissions and add

o he local environmen, hereby oseting some o boh he climae and noncli-

mae harm o ossil uels. As ossil-uel producion exends o new unapped lands

and seas, governmens should help oil companies o se aside even more revenue

o eliminae he urher climae polluion ha heir new producion will cause.Fossil-uel companies already allocae money o proec agains oil spills and

reclaim mined-ou lands; i only makes sense or hem o use carbon markes o

miigae he ar larger risks rom climae change.

TABLE 5

Options for responsible energy policy

Proposal Description

1 Scale back and redirect ossil-uel

subsidies

Follow through on G20 commitment to end harmul

ossil-uel subsidies and then redirect portions orevenues to urther protect the climate through

international carbon markets

2 Insure against high-risk ossil-uel

development

Work with ossil-uel developers in high-risk areas to

invest in international carbon markets

3 Responsibly develop new ossil uels Have new ossil-uel production ofset a portion o its

climate impact by investing in emissions reductions

through international carbon markets


31/44


Bringing any o hese proposals ino being would require careul policy design and

srong poliical leadership o assuage economic and compeiiveness concerns.

Inernaional leaders acing in concer would provide he bes chance o meeing

hese challenges and avoiding new regulaions ha orce ossil-uel developers o

migrae overseas. Inernaional lending and developmen bodies such as he World

Bank and he IMF could accelerae he process by implemening hese requiremensand aciliaing a poliical and echnical discussion o suiable policy opions.

Strengthen climate goals through markets

Simply pu, o sop caasrophic climae change, high-polluing naions, boh

developed and developing, need o urher reduce heir emissions. Inernaional

carbon markes can help enable such reducions. As was he case previously, a

ew key counries will need o provide he leadership o engender sronger global

climae commimens.

Europe needs o lead by seting an ambiious climae arge or 2030 and by

resuming is prior place as he worlds mos vocal developed counry climae

champion. o maximize is moral and poliical leadership on his issue, Europe

should se a arge in line wih he demands o science and hisorical responsibili-

ies. Tis likely will mean reducing EU emissions a leas 45 percen below 1990

levels by 2030. Te easies way or Europe o mee igher emission arges would

be o reduce he number o emissions permis i sells o European polluers in

Europes emissions-rading sysem hereby increasing demand and prices or iner-

naional carbon-marke credis. Wih he new geographic resricions imposed by

Europe ha exclude middle-income counries rom European carbon markes,

more demand or inernaional carbon credis would direcly suppor climae

acion and susainable developmen in leas developed counries. Te ailure o

he aoremenioned back-loading proposal evidences he challenges ahead or

renewed European leadership, bu European leaders mus overcome hese chal-

lenges. Te European Union should carry hrough his proposal and hen move on

o he bigger ask o increasing is climae ambiion by ighening is climae arge.

A number o major emerging economies, mos noably China, India, andIndonesia, also need o ranslae heir srong domesic policies ino global climae

leadership. weny years ago he world hough ha he way o solve he climae

problem was or developed counries o reduce heir emissions and or developing

counries o ollow wih developed-counry suppor. In he ensuing years many


32/44


developed counries proved unable o overcome domesic poliical obsacles

and ailed o ake he necessary acion. Many as-growing developing counries

over he same period began o realize boh heir abiliy o reduce heir emissions

and he hrea posed by climae change o heir uure success. Tese emerging

economies now need o ransiion rom domesic emission reducions o global

climae leadership by adoping sronger climae goals, helping oher counries osep orward o conron climae change.

Open markets to international credits

Leaders should urher use heir exising emissions-rading sysems o creae

increased demand or emission reducions in developing naions. Emerging emis-

sions-rading sysems in Caliornia, Ausralia, Souh Korea, and China represen

major new ools o drive global climae acion. Many o hese sysems, however,

including he European carbon marke, have placed igh limis on credis rominernaional carbon markes. Te hisory o inernaional carbon markes over he

pas decade indicaes ha he benes o supporing inernaional acion as well

as domesic emission reducions. Balancing domesic and inernaional emission

reducions would help leverage sronger climae acion abroad and reduce coss

a home in he ways described previously. For hese reasons, he exising carbon

markes should allow more inernaional credis.

Tose who argue agains his usually claim ha inernaional sandards are no

high enough. Te soluion o his, however, is or purchasers o se even higher

sandards o weed ou quesionable projecs raher han o exclude whole groups

o inernaional sellers, as is currenly he case. Denying credis rom projecs in

emerging markes, or example, could cu o exremely poor regions o hose

counries and could preven carbon markes rom shifing he course o some o

he ases-growing sources o emissions in he world, such as he elecriciy secor

in China or he oresry secor in Indonesia. By opening up and holding markes

o high sandards, Caliornia, Japan, Souh Korea, and China could help raise he

qualiy o all carbon markes while also creaing a global culure o marke-based

climae acion. As described below, inernaional bodies, boh exising and new,

could urher help smooh his opening by encouraging global carbon markes osandardize heir procedures and elevae he qualiy o heir emission reducions.


33/44


Empower consumers

Ouside o governmens, convincing consumers o ake acion hrough iner-

naional carbon markes could go a long way oward meeing he challenges o

climae change. Alhough governmen acion is vially imporan, i need no be

he only means o supporing global carbon markes, paricularly since he processo seting climae policy is moving slowly a he global level and in key counries

such as he Unied Saes. Many people around he world are deeply concerned

abou climae change. Te share o he populaion ha viewed climae change

as a personal hrea a he end o 2010, he las ime such a poll as aken, was 75

percen in Japan, 78 percen in Brazil, 53 percen in he Unied Saes, 60 percen

in Germany, and 21 percen in China.91 In he Unied Saes his number has since

seadily crep upward o 58 percen oday.92 Inernaional carbon markes have

creaed an easy means or individuals o nance emission reducions around he

world. Encouraging people o ake acion hrough inernaional carbon markes

could prove a game changer in he gh agains climae change.

Companies have ried o marke carbon credis o consumers in he pas wih limied

success. Airlines allow passengers o ose he emissions rom heir ighs, and many

websies sell carbon-marke credis, bu hese iniiaives have no gained a mass ol-

lowing. Recen rends in social media, mobile compuing, and online crowd-based

nance, however, may have creaed he ipping poin needed or consumer-nanced

carbon markes. Tese new echnologies and businesses now enable hundreds o

millions o people around he world, many o hem in he developing world, o sup-

por and inves in each ohers projecs and businesses on he Inerne.

Succeeding his ime will require ollowing he examples o recen high-prole

social business venures. One such venure called Produc Red, a collaboraion

beween major corporaions and he singer acivis Bono, raised $200 million or

HIV/AIDS programs in Arica and increased he prole o he issue by having

companies creae specially branded versions o heir producs and hen donaing a

porion o heir revenues.93 Te crowdunding websie Kicksarer has raised more

han $555 million or new business and personal venures by enabling compa-

nies and individuals o pich new produc ideas o millions o consumers.94 Te

company Mosaic has already developed a similar model or leveraging invesmensin roofop solar generaion or consumers.95 Tese and similar innovaions are

doing or chariable nance and socially responsible invesing wha Facebook and

witer have done or media over he pas 10 years. Social enrepreneurs, projec

The share of tpopulation th

viewed climat

change as a

personal threa

the end of 20

the last time s

a poll as taken

was 75 percen

in Japan, 78

percent in Bra

53 percent in

United States,

60 percent in

Germany, and

percent in Ch


34/44


developers, and projec nanciers, wih he suppor o venure capial, should

explore how o apply such models o carbon markes.

Policy innovation

International carbon-market coordinating body

Te prolieraion o carbon markes brings major risks and opporuniies.

Compeiion, as described above, could lead o a race o he botom among

carbon markes or environmenal sandards and ransparency. Such declines in

qualiy could urher scare away poenial sources o demand or emission reduc-

ions rom he leas developed naions, such as he emerging emissions-rading

sysems in Caliornia, China, and Souh Korea. As is he case or global echni-

cal- and inormaion-sharing bodies or inernaional ransporaion saey, oodsaey, inellecual propery righs, and scienic, commercial, and manuacuring

sandards, a new global body could help guide he new carbon markes oward

producive compeiion and benecial innovaion.

Te world needs a global nancial body o help advise, enable, and where appro-

priae coordinae inernaional carbon markes. Tis body could play a number o

roles, including convening, helping naions o se echnical sandards, compiling

and sharing inormaion, and assising carbon markes in exploring he easibil-

iy o allowing exchanges o carbon credis across sysemsa process known as

linking ha would poenially creae a common global carbon currency. Tese

services would help improve he perormance and qualiy o inernaional and

naional carbon markes, while a he same ime encouraging he spread o such

markes o an ever-increasing number o counries and communiies.

Tis new body should be separae rom exising carbon-marke mechanisms bu

draw on heir capaciies and experise. Te exising carbon markes, mos noably

he Clean Developmen Mechanism, ace a coninuing credibiliy challenge ha

would undermine heir abiliy o exercise he leadership required o he new body.

Te Green Climae Fund, a new inernaional climae change body creaed lasyear, could poenially ll some o hese roles, bu i aces a number o poliical

challenges and will no be ready o ac or some ime. A a minimum, a ransi-

ional body is required ha could draw on he experience and sa capaciies o


35/44


he CDM bu in a new conguraion. One opion would be o posiion he new

coordinaing body as a join projec o he IMF, he World Bank, and he Unied

Naions, poenially housed a he IMF given is superior experience wih iner-

naional nancial markes. Regardless o locaion, hese organizaions could help

provide he convening and poliical leadership o creae such a coordinaing body.

Governance reforms

Counries should encourage carbon-marke regulaors o make urher reorms

and help resore heir credibiliy. Exising carbon markes, especially he CDM,

coninue o ace image problems semming rom heir pas ailures and remain-

ing deciencies. Tese realiies and percepions undercu poliical suppor or

hese markes and poison he waer or he new carbon-marke sysems emerg-

ing around he world. Expers including he panel brough ogeher in 2012 by

he Unied Naions o assess he CDM have proposed a number o consrucivereorms ha would go a long way oward resoring marke credibiliy and avoid-

ing uure problems. Tese necessary reorms call or more ransparency, beter-

dened roles or carbon-marke regulaors, appeals mechanisms and due process

a more sreamlined process or approving projecsand saeguards o ensure

he inegriy o emission reducions and susainable developmen oucomes.

Counries should adop hese reorms o ensure and srenghen he CDM and

clear a pah or new carbon markes.

Learning-by-doing

Counries should urher push exising and new carbon markes o encourage

innovaion and pracical experiences ha migh bes be described as learning-

by-doing. Global carbon markes have helped blaze he rail or many o he

mos imporan climae policies. Tey can coninue o play his caalyic role in a

number o areas including new secoral-crediing markes. Allowing counries o

buy and sell new carbon securiies represening emission reducions across enire

economic secors, as described above, has he poenial o increase climae acion

sharply in boh developed and developing naions alike, jus as more limied CDMprojecs have done. Secoral ransacions are likely o involve emission reduc-

ions and nancial ows many orders o magniude larger han CDM projecs.


36/44


Successully esablishing such sysems would require keeping he privae secor,

wih is energy and creaiviy, a he cener. Secoral regimes should seek o creae

nancial incenives or he privae secor o coninue o erre ou he lowes-cos

and larges emission reducions.

Carbon markes could play a paricularly posiive role in helping o reduce emis-sions rom he ores secor. Despie he ac ha deoresaion generaes around

15 percen o global greenhouse-gas emissions,96 he Kyoo Proocol largely

excluded he ores secor rom he CDM and hereby rom Europes emissions-

rading programs. Tis has undermined acion by many oresed counries, such

as Brazil, Indonesia, and he Democraic Republic o he Congo, and lef hose

counries and he secor underserved, despie heir many low-cos emission

reducions.97 Reducing emissions rom he oresry secor would bring wih i a

variey o benes including improved legal proecions or small landholders and

indigenous communiies, beter waer qualiy or downsream communiies and

arms, and proecions or biodiversiy and endangered species. Exising and newcarbon markes should accelerae acion in his imporan secor by expanding

heir eors o credi emission reducions rom oress.


37/44


Conclusion

Global carbon markes coninue o suer under he weigh o a widely held repu-

aion o environmenal ailure and regulaory mismanagemen. Tis percepion

masks a ar more imporan legacy o acceleraing climae acion and supporing

susainable developmen by changing he way people all around he world hink

abou he poenial o climae policy o bene heir lives. Whereas a decade ago

climae acion was somehing mos people in he world el ha ohers, speci-

cally developed naions, should underake, global carbon markes have conribued

o he new global consensus ha well-designed climae policies can urher localand naional prioriies including economic growh and susainable developmen.

Inernaional carbon markes, like he sock markes and morgage securiies beore

hem, cerainly require beter oversigh bu hey are also invaluable ools or incen-

ivizing climae acion in ways ha bene people around he world. Naions need o

work harder o reorm exising markes and creae new ones, and i hey do, carbon

markes can help he world rise o he pressing challenge o climae change.


38/44


About the authors

Nigel Purvis is he ounder, presiden, and chie execuive ocer o Climae

Advisers, a Washingon, D.C.-based consulancy specializing in U.S. climae

change policy, inernaional climae change cooperaion, global carbon markes,

and climae-relaed ores conservaion. Previously, Purvis direced U.S. environ-menal diplomacy, mos recenly as depuy assisan secreary o sae or oceans,

environmen, and science. In ha capaciy he oversaw U.S. oreign policy rela-

ing o climae change, biodiversiy conservaion, oress, oxic subsances, ozone

depleion, and environmenal aspecs o inernaional rade, as well as serving

as he depuy chie U.S. climae negoiaor. He currenly holds climae change

and inernaional aairs research appoinmens a Resources or he Fuure, he

German Marshall Fund o he Unied Saes, and he Brookings Insiuion. He

also serves as he execuive direcor o he biparisan Commission on Climae and

ropical Foress. He is a prize-winning honors graduae o Harvard Law School.

Samuel Grausz is a direcor o policy and research a Climae Advisers and man-

ages is domesic energy, ransporaion, and carbon-markes pracices. He has

exensive experience working wih leading energy companies and has co-auhored

several sudies or prominen hink anks including Resources or he Fuure, he

Brookings Insiuion, and he Cener or American Progress. Grausz also holds

a research posiion a RFF where he works wih leading economiss on a broad

se o energy and environmenal policy issues ranging rom sae-level energy

eciency policies o naional carbon policy. Previously, he worked a Naional

Economic Research Associaes, an economic consuling rm where he parici-

paed in environmenal, energy, anirus, and inellecual propery cases. Grausz

received his bachelors degree in economics and poliical science magna cum

laude rom Amhers College.

Andrew Light is a Senior Fellow a he Cener or American Progress special-

izing in inernaional climae and science policy, and a proessor a George

Mason Universiy where he is direcor o he Cener or Global Ehics. He leads

he Cener or American Progresss work on inernaional climae issues includ-

ing paricipaion in he Global Climae Nework and eors involving he U.N.

Framework Convenion on Climae Change meeings. He has auhored, co-auhored, and edied 17 books including:Environmental Values published in

2008;Philosophy and Design published in 2008; Controlling echnology published

in 2005;Environmental Ethics published in 2003;Moral and Political Reasoning in

Environmental Practice published in 2003; echnology and the Good Life? published


39/44


in 2000; andEnvironmental Pragmatism published in 1996. Ligh is also co-

edior o he journalEthics, Policy, and Environment. His docoral work was a he

Universiy o Caliornia a Riverside and UCLA in ehics and public policy, and he

compleed a hree-year posdocoral ellowship in environmenal risk assessmen

in he School o Medicine a he Universiy o Albera, Canada.


40/44


Endnotes

1 The World Ban, Turn Down the Heat: Why a 4CWarmer World Must Be Avoided (2012), available athttp://climatechange.worldban.org/sites/deault/les/Turn_Down_the_heat_Why_a_4_degree_centri-grade_warmer_world_must_be_avoided.pd.

2 Elisabeth Rosenthal and Andrew Lehren, Prots onCarbon Credits Drive Output o a Harmul Gas, The NewYork Times, August 8, 2012, available at http://www.nytimes.com/2012/08/09/world/asia/incentive-to-slow-climate-change-drives-output-o-harmul-gases.html?pagewanted=all.

3 Shanar Vedantam, kyoto Credits System Aids theRich, Some Say, The Washington Post, March 12,2005, available at http://www.washingtonpost.com/wp-dyn/articles/A28191-2005Mar11.html;Jerey Ball, U.N. Warming Program Draws Fire, TheWall Street Journal, July 11, 2008, available at http://online.wsj.com/article/SB121573736662544537.html; kathrin Hille, China Leads Race to Exploit

Trading System, Financial Times, December 1, 2009,available at http://www.t.com/intl/cms/s/7d18be32-de97-11de-ad-00144eab49a,Authorised=alse.html?_i_location=http%3A%2F%2Fwww.t.com%2Fcms%2Fs%2F0%2F7d18be32-de97-11de-ad-00144eab49a.html&_i_reerer=#axzz2PW0C6ot;Christopher Booer, The Clean DevelopmentMechanism Delivers the Greatest Green Scam o All,

Telegraph.co.u, August 28, 2010, available at http://www.telegraph.co.u/comment/columnists/christo-pherbooer/7969102/The-Clean-Development-Mecha-nism-delivers-the-greatest-green-scam-o-all.html.

4 The World Ban, State and Trends o the Carbon Maret2006 (2006), available at http://www-wds.worldban.org/external/deault/WDSContentServer/WDSP/IB/2006/09/29/000310607_20060929120548/Rendered/PDF/375790State0o1Maret0200601PUBLIC1.pd.

5 Alexandre kossoy and Pierre Guigon, State and Trendso the Carbon Maret 2012(2012), available at http://siteresources.worldban.org/INTCARBONFINANCE/Resources/State_and_Trends_2012_Web_Opti-mized_19035_Cvr&Txt_LR.pd.

6 UNEP Risoe CDM/JI Pipeline Analysis and Database,avaliable at http://www.cdmpipeline.org/.

7 Vietnam Can See Great Opportunities rom CarbonMaret, Vietnam Bridge, December 13, 2012, avail-able at http://eng lish.vietnamnet.vn/ms/environ-ment/54585/vietnam-can-see-great-opportunities-rom-carbon-maret.html; US Climate Action Networ,Whos On Board with the Copenhagen Accord (2010),available at http://www.usclimatenetwor.org/policy/copenhagen-accord-commitments; Juan Pedro Searle,Worshop on NAMAs Submitted by DevelopingCountry Parties (2011), available at http://unccc.int/les/meetings/ad_hoc_woring_groups/lca/applica-tion/pd/chile_approach_progress_in_chile.pd; FarhanHelmy, LEDS Cooperation: I ndonesias Perspective(Indonesia: National Council on Climate Change, 2012),available at http://www.mmechanisms.org/document/

SB36_sideevent_Japan/02_DNPI.pd.

8 kossoy and Guigon, State and Trends o the CarbonMaret 2012.

9 UNEP Risoe CDM/JI Pipeline Analysis and Database,available at http://cdmpipeline.org/ (last accessedMarch 2013).

10 Randall Spalding-Fecher and others, Assessing theImpact o the Clean Development Mechanism (Luxem-bourg: CDM Policy Dialogue, 2012), available at http://www.cdmpolicydialogue.org/research/1030_impact.pd.

11 Global Wind Energy Council, Global Wind Statistics2012 (2013), ava

Documents

Carbon Market Crossroads: New Ideas for Harnessing Global Markets to Confront Climate Change