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Emerald Article: Business and climate change: emergent institutions in global governance Ans Kolk, Jonatan Pinkse

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To cite this document: Ans Kolk, Jonatan Pinkse, (2008),"Business and climate change: emergent institutions in global governance", Corporate Governance, Vol. 8 Iss: 4 pp. 419 - 429 Permanent link to this document: Downloaded on: 11-12-2012 References: This document contains references to 39 other documents Citations: This document has been cited by 7 other documents To copy this document: This document has been downloaded 1789 times since 2008. *

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Ans Kolk, Jonatan Pinkse, (2008),"Business and climate change: emergent institutions in global governance", Corporate Governance, Vol. 8 Iss: 4 pp. 419 - 429 Ans Kolk, Jonatan Pinkse, (2008),"Business and climate change: emergent institutions in global governance", Corporate Governance, Vol. 8 Iss: 4 pp. 419 - 429 Ans Kolk, Jonatan Pinkse, (2008),"Business and climate change: emergent institutions in global governance", Corporate Governance, Vol. 8 Iss: 4 pp. 419 - 429

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Business and climate change: emergent institutions in global governance

Ans Kolk and Jonatan Pinkse

Ans Kolk and Jonatan Pinkse are based at the University of Amsterdam Business School, Amsterdam, The Netherlands.

Abstract Purpose This paper aims to explore how multinational corporations (MNCs) may operate in the context of a so-called emergent institution which is not yet settled and taken for granted, thus helping to shape a new form of governance with considerable private involvement. The case used to illustrate emergent institutions involves market mechanisms for climate change, particularly emissions trading. This instrument is a crucial component of the Kyoto Protocol, which has started to be implemented, but is still surrounded by uncertainty and diversity across countries/regions. Design/methodology/approach Information from MNCs responses to the Carbon Disclosure Project is used to shed light on their bargaining and nonbargaining activities and how these seem to relate to their overall strategy and location. Findings Both with regard to nonbargaining and bargaining strategies MNCs prevailing view seems that they have to deal with distinctive national patterns, adopting a multidomestic, frequently home-country-focused approach. Their responses vary according to the national situation, with the level of activity in emissions trading frequently shaped by local management. Yet, the type of corporate structures created by some MNCs indicates that they take into account that EU-ETS may form the onset for a more global emissions trading scheme. Research limitations/applications Since market mechanisms for climate change are just unfolding, follow-up studies into larger numbers of rms would be worthwhile to unravel the dynamics. The aspects identied in this paper can be used as starting point for such analyses. Practical implications The information and corporate considerations regarding market mechanisms for climate change can be helpful for both managers and policymakers in designing future approaches and reecting upon the limitations and opportunities for MNC involvement in global governance. Originality/value The paper explores how MNCs may help shape an emergent institution, considering the fact that they face the dualility of managing a global context and multiple local contexts. Keywords Global warming, Organizations, Multinational companies, Governance Paper type Research paper

In recent years it has been argued that governance patterns are changing as a result of internationalization and the concomitant emergence of non-state, private actors (e.g. Arts, 2006; Knill and Lehmkuhl, 2002; Pattberg, 2005). Such new arrangements beyond the state include a variety of governance concepts (public, private and mixed). Particularly global environmental issues have been used to illustrate the rise of this new global governance, with biodiversity and forestry as main examples where private involvement has played a role in furthering implementation and consensus-building on international frameworks adopted earlier in the process (Arts, 2006; Meidinger, 2006; Pattberg, 2005). Climate change can be mentioned as another case in point.
Since March 2006, the research on climate change by both authors has been supported by The Netherlands Organisation for Scientic Research (NWO).

Although the Kyoto Protocol entered into force in 2005, some countries including the US have not ratied, while others such as Japan, Canada and Russia are still unclear about their exact plans on how to implement it. This especially applies to the market mechanisms as

DOI 10.1108/14720700810899167

VOL. 8 NO. 4 2008, pp. 419-429, Q Emerald Group Publishing Limited, ISSN 1472-0701


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established under the 1997 Kyoto Protocol. Political disagreements about the exact rules for the use of market mechanisms (particularly emissions trading) and the appropriateness of legally binding targets for emission reduction have made a global institutional framework for climate change mitigation, accepted by all countries, problematic. Only in the EU, more concrete steps have been taken with the start of an emissions trading scheme per 1 January 2005, but even there large uncertainty exists about details of implementation and about the precise arrangements in future years (Egenhofer, 2007; Kolk and Hoffmann, 2007; Markussen and Svendsen, 2005). This has a large impact on those companies operating in the various regions that are exploring concrete steps to face the new realities of market mechanisms for climate change. In the management literature, the label emergent institutions has recently been introduced to characterize such arrangements that lack taken-for-grantedness and are surrounded by uncertainty about their permanence (Henisz and Zelner, 2005; Suchman, 1995). The lack of widespread acceptance and clarity mean that such emergent institutions are highly susceptible to pressures for change. It also implies, however, that companies which are affected, intend to participate and/or are already taking steps have the possibility to inuence the development of market mechanisms for climate change (cf. Lawrence, 1999; Zucker, 1987). This is openly acknowledged by some companies; Shell, for example, notes that as governments develop trading systems and allocation plans are drawn up, rms have the opportunity to inuence the direction of these developments. In view of their size and spread, particularly the potential role of multinational corporations (MNCs) in helping shape policies globally, in both home and host countries, has received attention (e.g. Boddewyn and Brewer, 1994; Rugman and Verbeke, 2001; Westney, 1993). In this paper we will explore how MNCs may operate in the context of a so-called emergent institution that is not yet settled and taken for granted, thus helping to shape a new form of governance with considerable private involvement. The case that we use to illustrate such upcoming arrangements involves market mechanisms for climate change. This instrument is a crucial component of the Kyoto Protocol and has started to be implemented, but is still surrounded by uncertainty and diversity across countries/regions. The paper presents some exploratory ndings reported from large multinationals on their bargaining and nonbargaining activities on market mechanisms and how this seems to be related to their overall strategy and location. This will yield insights not only for policymakers active in engaging companies in the governance of climate change, but also suggest directions for further academic research, particularly on the way in which multinationals respond to and try to inuence the development of market mechanisms. Our focus on MNCs, which builds on the international management literature, adds a private governance perspective that has not received much detailed attention in the more general discussion on global governance. The set-up of this paper is as follows. The rst section will characterize the current state of market mechanisms for climate change. Subsequently, somewhat more attention is paid to theoretical insights on the interaction between MNCs and institutions as far as relevant for the climate change issue. This will be followed by an exploration of MNC responses to emergent institutions for climate change, divided into bargaining and non-bargaining strategies. In that section, we will use some of the raw data that has become available through responses by the Financial Times Global 500 companies to the second questionnaire as sent by the Carbon Disclosure Project. We will quote those company responses most appropriate to the topic of this paper, such as the Shell statement mentioned above, as illustrations. The paper will also indicate areas that deserve further study, considering the implications for the future governance of climate change.

Market mechanisms for climate change

The main market-based instrument for climate change is emissions trading through a cap-and-trade system. Participating countries in the Kyoto Protocol are allowed to exchange part of their obligations with another party (Grubb et al., 1999). This intergovernmental emissions trading regime, which enables countries to transfer greenhouse gas (GHG) emissions, has led to the creation of domestic systems to trade emissions at an industry level. This means that industry needs a permit to emit GHGs and


governments allocate allowances that determine how much (the cap). If individual countries launch similar national emissions trading schemes, the two can be linked and industries/companies can engage in cross-border trade of emission allowances. In addition to emissions trading, Kyoto also enabled two projected-based instruments: joint implementation (JI) and the clean development mechanism (CDM). They allow countries to reduce emissions resulting from cross-border investments (Grubb et al., 1999). JI can only be used between two countries that both have an obligation to reduce emissions; they have to agree on how to divide the reduction credits. In the case of CDM, the receiving country of a cross-border investment is a developing country that does not have an obligation to reduce emissions (yet). The investing country can thus use all obtained credits for compliance with its own commitment. Notably, CDM credits from early project activities (from 2000 onwards) can be used for compliance in the rst commitment period (2008-2012). Consequently, CDM became operational already before the Kyoto Protocol entered into force (Streck, 2004). Both JI and CDM allow industry involvement (private investments). Looking at the size of these markets, the combined value of CDM amounted to $5.3 billion and JI to $141 million in 2006 (2005 gures were $2.6 billion and $68 million respectively; Capoor and Ambrosi, 2007, p. 3). Although not mature yet, experts assess it as more mature than before, and as leading to cost-effective emissions reductions (Rine and Hasselknippe, 2007). Emissions trading accounted for a much larger share of the total carbon market, $24.6 billion in 2006, which was a threefold increase compared to 2005 (Capoor and Ambrosi, 2007, p. 3). Although the Kyoto Protocol has established market mechanisms, international disagreements have led countries to design emissions trading schemes independently, with varying roles for specic industries. In Europe, several emissions trading schemes evolved (i.e. in Denmark, which started in 1999; the UK, in 2002), but by far the most important has been the emissions trading scheme for CO2 at the EU level (EU-ETS), which began in 2005. EU-ETS primarily affects energy producers (including electric utilities), metals, cement, pulp and paper. However, large combustion installations are also covered, which means that other industries with energy-intensive activities, for instance automotives and food processing, require permits as well and received allowances. Interestingly, aluminum and chemical industries are exempted from EU-ETS, supposedly due to their strong lobbying activities (Butzengeiger et al., 2003; Markussen and Svendsen, 2005). While EU-ETS is meant to ensure harmonization of emissions trading across the EU, the detailed plans for the allocation of allowances (National Allocation Plans) and for monitoring participants emissions data are left to the individual national governments. Through a linking directive, credits earned with JI and CDM can be used to fulll the obligations under EU-ETS. It is again up to member states whether a limit will be imposed on the use of such credits. EU-ETS by far accounts for the largest share of the carbon market, with a market value of $24.4 billion in 2006 (compared to $7.9 billion in 2005) (Capoor and Ambrosi, 2007, p. 3). Other industrial countries that ratied the Kyoto Protocol have not yet created schemes equivalent to EU-ETS. In Japan, progress on climate policy and emissions trading has been slow due to disagreement between the Environment Ministry and the Ministry of Economy, Trade and Industry (METI) (Schreurs, 2002). In 2004, the Environment Ministry proposed a voluntary emissions trading scheme and carbon tax, but Japanese companies strongly opposed such a voluntary scheme because they feared it might become obligatory (Arita, 2004; Watanabe, 2005), with METI underlining the harmful effect for Japanese companies competitiveness. By contrast, CDM is viewed as a cost-effective way to take advantage of prior investments. So far, the government has merely introduced mandatory information disclosure, which means that industry has to report its GHG emissions (Watanabe, 2005). In Canada, the government nally issued a plan in 2005 to achieve Kyoto compliance. Emission targets focus on mining and manufacturing, oil and gas, and electric utilities. Companies may purchase emission reductions from others with excess reductions, but no exact rules for such trades were indicated. The plan also announced a Climate Fund that buys credits from emission reduction projects on behalf of the Canadian government. It


should be noted, however, that implementation has stalled since the new government has distanced itself from the plan (and also from Kyoto more generally). Despite US and, until recently, Australian rejection of Kyoto, some trading schemes emerged there. In the US, a private trading scheme was created in 2003, the Chicago Climate Exchange, in which a number of MNCs, local companies, governments and NGOs participate. CCX aims to demonstrate that climate change can be managed on a voluntary basis and that market mechanisms are viable. Participants commit to voluntary reduction targets, with trading of allowances and offsets as options. Geographically, the scheme is restricted to projects on the American continent. Although CCX shows parallels to EU-ETS, participation is voluntary and it includes all six GHGs covered by the Kyoto Protocol, not just CO2. In 2006, its value amounted to $38 million ($3 million in 2005) (Capoor and Ambrosi, 2007, p. 3). In Australia, the New South Wales Greenhouse Gas Abatement Scheme was launched early 2003 by the state government. It is mandatory for electricity generators, retailers and large market customers; and voluntary for other companies. Its 2006 market value was $225 million ($59 million in 2005) (Capoor and Ambrosi, 2007, p. 3). In recent years, the US has seen the emergence of several trading schemes at the regional level, while Australia seems to be moving towards a nation-wide system. How all of this will work out, also under a new US president, remains to be seen, though. Hence, although emissions trading and carbon offset projects are part of institution building on an intergovernmental level, and the market size is growing substantially, the governance of this climate change instrument is still evolving and its ultimate form is uncertain. Clear distinctions have surfaced between and among ratifying and non-ratifying countries. Below we will analyze how this variation affects MNCs, using insights from the international management literature.

MNCs and institutions

The relation between MNCs and institutions is complex due to the peculiarities of operating across borders. In the eld of international management, attention has focused not only on the conformity of organizational practices that institutions invoke, but also, and perhaps more importantly, on the divergent pressures on MNCs. MNCs institutional contexts reect a duality a global context and multiple local contexts (see, e.g. Prahalad and Doz, 1987; Rosenzweig and Singh, 1991; Westney, 1993). Moreover, MNCs frequently belong to several industries and thus participate in different industry-level elds simultaneously. These often exert conicting pressures on MNCs, which can lead to contradictions (Westney, 1993). These include the choice between transferring standardized practices from the home country to foreign subsidiaries and developing a variety of practices tailored to local needs (Bartlett and Ghoshal, 1989; Prahalad and Doz, 1987). In some instances standardization turns out to prevail, in others the inuence of the local situation was more important. Applied to climate change, we see a global issue governed by an international approach (the United Nations Framework Convention on Climate Change, the Kyoto Protocol), but which is being implemented (particularly through emissions trading schemes) at a local, national or regional level. In this situation, MNCs may follow a global approach to minimize costs or exploit possible opportunities from coordinated emissions reduction. However, the variety of approaches adopted by governments could also justify a more multidomestic, country-by-country or regional approach to cope with, and/or prot from, existing differences (cf. Bartlett and Ghoshal, 1989; Rugman and Verbeke, 2004). This would fall in line with the diversity of perceptions regarding the need to act on climate change, as well as the different political, geographical and economic realities that have shaped governments behavior on the issue. MNCs can also change the boundaries of an organizational eld (Westney, 1993). While the view presented above usually implies that an MNC consists of a set of relatively independent subunits belonging to several organizational elds, it can also be seen as entity that together with its global competitors constitutes a single organizational eld. This would mean that MNCs within the same global industry may increasingly resemble each other with converging perceptions of how to respond to particular issues. MNCs thus change the boundaries of an organizational eld by widening it across national borders (Westney, 1993);


this is also notable in the case of climate change, which has emerged as a global issue arena (Levy and Kolk, 2002; cf. Hoffman, 1999). The emergent nature means that MNCs could play the role of institutional entrepreneurs (cf. Maguire et al., 2004) which help shape new practices in such elds, and impact on global governance. The development of climate change policy has taken place in a fairly disorderly way in which many different interest groups, but most notably MNCs, have tried to inuence their exact shape. Most recently, this has also started to apply to market mechanisms, where vested interests have played a considerable role, particularly in ghting the launch of emissions trading schemes. Despite backing by a considerable number of companies, including powerful oil MNCs (e.g. BP, Royal Dutch/Shell), emissions trading have also been widely opposed (Christiansen and Wettestad, 2003; Gulbrandsen and Andresen, 2004; Markussen and Svendsen, 2005). For example, European steel and chemical industries lobbied against the launch of EU-ETS (Markussen and Svendsen, 2005). US Congress has rejected proposals to launch a mandatory emissions trading scheme on a federal level; local/regional initiatives covering multiple states are nevertheless emerging. The question is in what way MNCs are responding now that market mechanisms are being implemented but still uncertain, and how this private involvement affects and shapes the global governance of climate change. The next section will explore these two components, focusing respectively on bargaining and nonbargaining strategies as identied in the literature. In view of the emergent state of market mechanisms and the absence of systematic data about actual MNC activities, we will refer, as noted in the introduction, to some exploratory results from responses to the Carbon Disclosure Project. MNCs report only to a limited extent; interesting enough to sketch developments and indicate the range of responses, but not extensive enough to allow a more detailed elaboration of results as done on other topics (e.g. Kolk and Pinkse, 2005). Of the 218 MNCs that made responses available, more than half (113) provided information, but mostly on nonbargaining activities, however. We recognize the limitations in relying solely on published/self-reported data (see Kolk and Pinkse, 2007). However, we believe that the information nevertheless provides important insights into companies perceptions of policy instruments such as emissions trading and, in particular, the positions they adopt in public policy debates, thus helping to shape the governance of climate change.

Exploring MNC responses to emergent institutions for climate change

MNCs can adopt various approaches in response to the different national, regional and global institutional pressures (Henisz and Zelner, 2005; Lawrence, 1999; Oliver, 1991), ranging from bargaining to nonbargaining strategies (Boddewyn and Brewer, 1994). With bargaining strategies companies actively try to shape institutions through activities such as lobbying and partnerships with institutional actors. Nonbargaining strategies imply that companies respond to institutional pressures through compliance or avoidance. Compliance means that companies incorporate an organizational practice to anticipate particular benets that may be gained in the future, while in case of avoidance companies try to prevent conforming to institutional pressure, for example by relocating production activities (Oliver, 1991). According to Boddewyn and Brewer (1994), the intensity of strategic responses to institutional pressures can also differ. The fact that an emergent state leads to uncertainty about an institutions permanence may affect the intensity of MNCs responses, leading to the adoption of more supercial strategies that are not accompanied by strong internal organizational support structures (Jiang and Bansal, 2003; Milstein et al., 2002). In the case of market mechanisms, some companies explicitly underline the existing uncertainty and their consequent hesitation to assign internal resources:
However we havent engaged into active trading yet, because a number of important boundary conditions, especially the ones with respect to project based instruments still need political clarication at the EU/international level (DaimlerChrysler). It is difcult to implement detailed plans until various procedures are established including the relationship between trading schemes in different countries, whether clean development


mechanisms, joint implementation plans, and sequestration will be allowed and how reductions from combined heat and power projects will be treated (Abbott Laboratories).

Bargaining activities Previous studies showed that MNCs used their political clout to inuence the process of building institutions for climate change, for example by pressurizing home-country governments in the Kyoto negotiations (see Levy and Egan, 2003; Levy and Kolk, 2002). Obviously, most companies tend to be silent about lobbying activities, although in the US somewhat more openness may be expected due to the particular political culture. It is also notoriously difcult to investigate in view of the secrecy and behind-the-scenes nature. The tendency, for example, to contest US regional carbon trading initiatives (see Rabe, 2006), seems not something that the companies involved will proudly report. Nevertheless, a number of particularly energy-intensive MNCs disclose bargaining activities on market mechanisms: either related to the early stages of emissions trading schemes, where MNCs try to inuence the design, or to later phase where they lobby for a favorable allocation of allowances. Examples of MNCs that report to focus on inuencing the design of schemes in home and host countries simultaneously are BP, Ford and Stora Enso: they have been involved in development and evaluation of regulatory schemes in the EU and voluntary schemes in the US (particularly CCX). Two Canadian companies, Suncor and Petro-Canada, have a strong home-country focus in helping to set up a Canadian trading scheme. A few US MNCs have also adopted a home-country approach by engaging in the development of CCX. An example is American Electric Power, which frames it as a corporate effort to give emissions trading moral legitimacy by demonstrating that it is the right thing to do (Suchman 1995, p. 579):
AEP has supported CCX in numerous ways, including serving on the board, providing input on the development of the rulebook (including protocols concerning accounting, verication and validation of emission reductions), and by purchasing allowances in the initial CCX auction. We are doing so to demonstrate the cost-effectiveness of reducing emissions by utilizing this market-based instrument. It is our hope that the lessons learned will inform the policy debate on climate change and positively inuence the design of greenhouse gas mitigation policies at the international, federal and state levels.

Corporate involvement in the allocation process is currently limited to MNCs affected by EU-ETS. Because it was established by EU directives, MNCs do not face much uncertainty about broad design issues, but merely about the outcome of the allocation process. European companies thus tend to focus on the latter, mostly by either trying to affect the design of the National Allocation Plans or to lobby for favorable allocations. Only one non-EU company (ExxonMobil, a well-known player in the climate issue, cf. Levy and Kolk, 2002) also mentions involvement in the political process of drawing up National Allocation Plans. Japanese companies remain silent on their bargaining strategy, which may be due to cultural peculiarities; this is notable because their government has been discussing the launch of an emissions trading scheme to meet Kyoto commitments. Overall, most MNCs that mention bargaining activities adopt a multidomestic, home-country-focused approach, thus conrming Barons (1997) argument that such corporate political activities tend to be less global in nature. At rst sight, this contrasts somewhat with Levy and Kolk (2002) who found that large oil MNCs moved towards a common, global perception of their institutional context. It might well be that a process of changing boundaries of an organizational eld to form one global industry (cf. Westney, 1993) is a particular attribute of the oil industry; other sectors seem to be much more focused on their home country/region. As also noted elsewhere (Kolk and Pinkse, 2007), cross-border political engagement is not widely reported, however. The most explicit in this regard are US MNCs that have responded to (upcoming) European regulations. In addition, there are a few examples where MNCs from one EU country cooperate with or lobby government in another country (Kolk and Pinkse, 2007). In most cases, however, companies have tended to focus primarily on their home countries, and to refrain from too much interference with host-country governments. This reects the reality that MNCs


` -vis home and host country governments. It bargaining power is generally not equal vis-a requires much exibility and bargaining power to persuade host-country governments to take an MNCs interests into account (Baron, 1995). In contrast, in its home country, a company typically has a much stronger foothold in the policymaking process, in part because the home country generally benets more from the companys activities (Baron, 1997). It may also be possible that MNCs only report a few activities, while they in fact, for example through industry associations, engage in more global and/or host-country lobbying. These are aspects that deserve further study, also to nd out to what extent such (a portfolio of) bargaining activities contributes to furthering global governance. Nonbargaining activities Compared to bargaining activities, disclosure on nonbargaining activities is more common. This only covers compliance, however; avoidance in the rather drastic form of relocating production (threats) is not mentioned. A recent web-based survey amongst 2,250 respondents conrmed this nding: only a handful referred to relocation, while compliance (via EU-ETS in the rst instance, and both internal abatement and CDM/JI as second) prevailed (Rine and Hasselknippe, 2007). It is not surprising that EU companies, particularly from those sectors directly covered, express more intention to participate in EU-ETS than their US and Japanese counterparts, indicating a home-country effect. They are also more inclined to become active in JI and CDM, although much less than in emissions trading (the market values for the respective activities, as outlined above, reect this). However, a host-country orientation can also be noted for some US MNCs with activities in the EU, because they aim to comply with all regulations. Ford gives a different argument for participation in EU-ETS: to gain experience out of the belief that it is a cost-effective way to reduce emissions. This suggests that MNCs start with emissions trading not only to comply with existing rules, but also to anticipate future developments elsewhere. Although the US and Australia have not ratied Kyoto, MNCs from these two countries do, interestingly enough, not lag behind MNCs from Japan and Canada, countries with a binding commitment. Several US and a few Australian MNCs express an intention to participate in EU-ETS and in locally-oriented schemes such as CCX and the NSW Scheme. This implies that Kyoto ratication is not decisive for MNCs: it seems more important that policies are actually being implemented in home or host countries (such as in the case of the EU). Suncor, for example, states that a clear direction from the Canadian government with respect to Kyoto obligations and standards to ensure emission reductions are standardized across an international market is a prerequisite for engagement in trading schemes outside the home country. This shows how linkages between international (Kyoto) and domestic developments can affect MNCs. The cautious position also reects the uncertainty created by the Canadian government for domestic companies with the relatively long period taken to come up with concrete policies to meet Kyoto commitments a similar situation still exists in Japan. In a sense, the absence of federal climate regulation in the US and, until recently, Australia can be seen as having provided clarity to MNCs from these countries; it allowed them to be relatively active in emissions trading in host countries because uncertainty about forthcoming domestic policies had been reduced. EU climate regulation may create some spillover effects as (non-Kyoto) emission markets in the US and Australia seem to attract relatively much attention from MNCs in metals, manufacturing, oil, gas, mining and utilities sectors covered by EU-ETS. In complying with emissions trading schemes, MNCs appear to mostly conform to the existing regulatory diversity by adopting a multidomestic approach:
Compliance with GHG regulations and participation in local or supra-national trading schemes such as the EU-ETS or the UK Climate Change Levy Scheme is a local or regional management decision (Unilever).


However, this does not necessarily mean that MNCs treat emissions trading as a purely local/regional strategy. Some MNCs mention the intention to use JI/CDM for the development of international project activities and thus bring their global presence into play. AstraZeneca, for example, states that:
[. . .] The proposed inclusion of the JI and CDM Kyoto mechanisms in the EU-ETS may open a route for the involvement of AstraZeneca operations outside the EU to play a part in our response to the scheme.

For some MNCs international dispersion of their operations has led to the development of a bi-regional strategy (cf. Rugman and Verbeke, 2004). Baxter, International Paper, Motorola and Stora Enso, for example, focus on EU-ETS and CCX, while BHP Billiton and Westpac combine EU-ETS with the NSW Scheme. Westpacs participation in the NSW scheme is partly motivated by the intention to enter EU-ETS because it hopes that Australian credits may become entitled for compliance with EU-ETS through a linking directive. Likewise, Suez is identifying possible opportunities to use reduction possibilities in other regions (US, Japan, Canada) for EU-ETS as well. Interestingly, three oil MNCs (BP, Royal Dutch/Shell, ChevronTexaco) show a view of (or desire for) the emerging emission market as one global system. Royal Dutch/Shell mentions a global, but initially fragmented, GHG market, while BP emphasizes the importance of EU-ETS as a rst step in the longer term development of much needed international market mechanisms, and that it must be designed to reach beyond the geographic boundaries of Europe. And ChevronTexaco states that:
While individual business units are responding to local opportunities and regulations associated with emerging GHG trading regimes, ChevronTexaco is also developing an overall corporate carbon markets strategy.

In a sense, such approaches may be seen as contributions to shaping a global governance of climate change, the precise components of which deserve follow-up research. It is not only through bargaining activities that MNCs can inuence emergent institutions, but also by taking concrete, often small (nonbargaining) steps that show the feasibility or future directions of such arrangements, offering feedback to policymakers and others involved. Some MNCs have, for example, tested emissions trading on a small scale to already gain some experience. This has included bilateral (demonstration) transactions, creation of an internal scheme or participation in a pilot scheme. It is notable that pilot schemes are mostly organized locally: Japanese companies participate in schemes set up by METI or the Environment Ministry and German MNCs in schemes on a state level or with local institutes. MNCs are also starting to make inventories of their GHG emissions, to facilitate (future) compliance and/or participation in voluntary schemes. Baxter, for example, states that setting an emission reduction goal and establishing a reporting and verication system to track performance is critical to ensuring compliance with emerging greenhouse gas regulations. In most cases, this means that an MNC collects emission data of installations affected by EU-ETS, but there are also companies that have systems covering worldwide operations. A number of MNCs is setting up internal structures as well. Some have created cross-functional teams that coordinate the companys response to regulatory developments in the EU. Others established a separate organizational unit that is not only responsible for the coordination of compliance with EU-ETS, but also for developing a company-wide strategy for emerging emission markets globally. Royal Dutch/Shell, for example, has created a separate unit to manage the overall Group approach to the various national and international markets, while Statoil has a Carbon Treasury that acts as the single operational interface with the emission trading market and will perform market operations on behalf of the installations operated by Statoil. Dow Chemical and Fortis have set up units that more strongly concentrate on the overall business opportunities from upcoming emission markets; Fortis, for example, intends to trade allowances on behalf of customers. Thus, although many MNCs, as the quotes from DaimlerChrylser and Abbott illustrated, tend to wait until there is more certainty, there are others which are building internal structures even though market mechanisms are only emerging.


This paper has explored multinationals responses to market mechanisms for climate change, and the (potential) role of private actors in advancing implementation of international (and regional/local) frameworks adopted earlier. The more mature emission market in the EU has inuenced the level of activity of European MNCs, particularly in those sectors covered by EU-ETS. However, the fact that a country has ratied the Kyoto Protocol does not necessarily mean that national industries take a similar position towards climate change measures; clarity about implementation and instruments seems more important. The long period taken by the Japanese and Canadian governments to reveal their approach to reduce emissions has led many MNCs from these countries to adopt a wait-and-see attitude. The unambiguous rejection of Kyoto by the US and, until recently, Australia, on the other hand, seems to have given MNCs from these countries much more leeway to get acquainted with emissions trading in host countries, and to explore such involvement if they see this as compatible with their overall strategy. MNCs in high-emission sectors face constraints in the EU at the moment, which are likely to become more stringent in the future, and can reasonably expect to be subject to regulation in other countries as well. This explains why for example US and Australian companies in sectors that fall under EU ETS have been relatively active in engaging in voluntary emissions trading schemes in their home countries. Both with regard to nonbargaining and bargaining strategies MNCs prevailing view seems that they have to deal with distinctive national patterns. Their responses vary according to the national situation, with the level of activity in emissions trading frequently shaped by local management. Yet, the type of corporate structures created by some MNCs indicates that they take into account that EU-ETS may form the onset for a more global emissions trading scheme. To adequately react to the emergence of trading schemes outside Europe, a considerable number of MNCs has started with reporting and verication systems to measure emissions and sometimes also establish an organizational unit responsible for a global strategy for this emergent international emission market. This will be helpful, also in the years to come, with evolving negotiations on a post-Kyoto regime as part of the Bali roadmap, in which market mechanisms are likely to become an even more important component. The ndings of this exploratory study thus suggest that the emergent state of climate change institutions leads to different corporate responses that seem to reect their country of origin, but also relates to their overall strategic peculiarities (particularly multidomestic, regional or global orientation). But the emergent state also means that the number of observations was fairly limited, which is a limitation of this study. Once more data are available, follow-up research can shed more light and also link MNCs climate strategies to the characteristics of their international presence in different markets (looking at both sales and production). It is noteworthy that, while countries have had difculty to arrive at one international solution for addressing climate change, despite the 1997 Kyoto agreement, MNCs are frequently responding to the existing variety with an eventual global approach in mind. They explicitly consider the possible impact of international diffusion of market mechanisms and reckon with the move towards a true international institution, in this way thus in fact helping to create and shape it. Further studies into this unfolding situation would be worthwhile to unravel these dynamics that may have interesting implications for the future of global (private) governance.

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About the authors

Ans Kolk is Professor of Sustainable Management at the University of Amsterdam Business School, The Netherlands. Her areas of research, teaching and publications are in corporate social responsibility and environmental management, especially in relation to the strategy, organization and disclosure of international business rms, and international policy. One of the topics on which she has published extensively in the past decade is business and climate change. Ans Kolk is the corresponding author and can be contacted at: Jonatan Pinkse is Assistant Professor at the University of Amsterdam Business School, The Netherlands. His areas of research, teaching and publications are in strategy and sustainable management. His PhD thesis, which has been awarded with the 2006 ONE Academy of Management Best Dissertation Award, dealt with business responses to climate change.

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