28 Int. J. Innovation and Sustainable Development, Vol. 9, No.

1, 2015

Carbon market and global climate governance:

limitations and challenges

Andra Cardoso Ventura*,

Luana das Graas Queirz de Farias,
Danielle Soares Paiva,
Guineverre Alvarez Machado de Melo Gomes
and Jos Clio Silveira Andrade
Business Administration,
Federal University of Bahia (Universidade Federal da Bahia UFBA),
Av. Reitor Miguel Calmon,
s/n Vale do Canela, Salvador, 40110-903 Bahia, Brazil
Fax: (71) 3283-7657
Email: andreaventurassa@gmail.com
Email: luanafffarias@yahoo.com.br
Email: paivadani@hotmail.com
Email: guineverre2@hotmail.com
Email: jcelio.andrade@gmail.com
*Corresponding author

Abstract: Climate change has been a challenge to international diplomacy and

to global climate governance (GCG) involving governments, companies and
civil society. This paper discusses the limitations and challenges of the global
carbon market as a mechanism of GCG and its role in the post-Kyoto period.
This study is part of an interdisciplinary and multi-institutional research about
GCG and carbon market and it is based on a deep literature review of national
and international academic publications, as well as institutional documents
from the United Nations international panel on climate changes (IPCC) and UN
framework convention on climate change (UNFCCC). The findings reveal the
limitations and challenges of the carbon market as a GCG mechanism to
face the climate change. It defends the necessity of developing countries
to strengthen their national and sub-national regulations in direction to a low
carbon economy.

Keywords: GCG; global climate governance; carbon market; climate change.

Reference to this paper should be made as follows: Ventura, A.C.,

Farias, L.G.Q., Paiva, D.S., Alvarez, G. and Andrade, J.C.S. (2015) Carbon
market and global climate governance: limitations and challenges, Int. J.
Innovation and Sustainable Development, Vol. 9, No. 1, pp.2847.

Biographical notes: Andra Cardoso Ventura is PhD in Administration at

Federal University of Bahia (UFBA) Brazil. Master degree in Administration
(2008) at UFBA, and in Estudios Contemporneos de Amrica Latina at
Universidad Complutense de Madrid (UCM). Fields of research: global
environmental governance; social and environmental conflicts, clean
development mechanism CDM project and social technologies.

Copyright 2015 Inderscience Enterprises Ltd.

 Carbon market and global climate governance 29

Luana das Graas Queirz de Farias is PhD in Administration. Professor at

Federal Institute of Education of Bahia (IFBA)-Brazil. Fields of research:
corporate environmental management and environmental strategies and global
environmental governance.

Danielle Soares Paiva is an Economist and Master and Doctorate in Business

Administration from the Federal University of Bahia (UFBA). She is researcher
at CAPES and Professor of Management Graduate. Her main fields of interest
in research are: carbon market, co-benefits, clean development mechanism and
sustainable development.

Guineverre Alvarez Machado de Melo Gomes is graduated in Law and Master

of Regional Development and Environment and Doctoral student in Business
Administration at the Federal University of Bahia (UFBA). Researcher of the
Global Environmental Governance and World Carbon Market.

Jos Clio Silveira Andrade is PhD in Administration. Professor at Federal

University of Bahia (UFBA) Brazil. Coordinator of the Global
Environmental Governance and World Carbon Market at UFBA. Fields of
research: international environmental regimes; environmental management and
international relations; clean development mechanism CDM project, cleaner
technologies and sustainable development.

1 Introduction

Since the United Nations Conference on Environment and Development (Rio-92), much
has been discussed about ways to mitigate climate change. At that time, the UNFCCC
was ratified (Barros-Platiau, 2011). Even though the climate change issue has been
strongly present in the public international debate since then (de Felice et al., 2013),
the economic approach to global warming was until very recently restricted to a small
number of political actors and it only gained visibility with the publication of the Stern
Report in 2006 (Veiga, 2009).
Twenty years after Rio-92, little progress concerning climate change can be noticed
(World Meteorological Organization, 2012), despite all the negotiation and propositions
deriving from GCG, here understood as the agreements and consensus between state and
non-state actors to deal with the issue. The non-state actors perform important economic,
political and social roles at the GCG and also at national and international levels (Farias
and Andrade, 2014).
According to Giddens (2010), climate change is situated at the core of the global
geopolitics and demands a competent response from the international community.
Among the challenges posed are planning and economic incentives for the
decarburisation of the global economy, adaptation and mitigation policies and
international negotiation. From this perspective, the importance of the markets and the
State in the mitigation of climate change is extremely recognised as the main actors to
allow the creation of technical and political solutions (Wickramasinghe and Gamaje,
2013). As Viola (2009) asserts, there should be a substantial increase in international
cooperation for climate governance.
Other authors defend the idea that it is necessary to have a multi-level GCG with
actions, strategies, public policies and programmes at international, regional, national and
30 A.C. Ventura et al.

local levels (Martins and Ferreira, 2011; Thoidou, 2013). Because of the complexity of
this issue, which transcends geographic boundaries, GCG has been developed within
an environment of growing segmentation, involving different interests of diverse
organisational and productive sectors, and fragmentation, encompassing actors from
distinct systems at supranational, international, national and sub-national scales
(Biermann and Pattberg, 2008).
Among the most important instruments for GCG, the Kyoto protocol (KP) established
goals for the countries with the greatest emissions of the greenhouse gases (GHGs)
between 2008 and 2012. To help these countries to find a more cost-effective
way to reach their reduction goal, this multilateral agreement creates flexibilisation
mechanisms. Among these, there is the clean development mechanism (CDM) a
market instrument aiming at a balance between economic development and environment
through the trading of GHG reduction resulting from the implementation of projects in
developing countries, financed by developed ones (de Simoni, 2009). Thus, the KP
represents an institutional landmark for the creation of the global carbon market.
As highlighted by the CDM Policy Dialogue (2012), the global carbon market represents
an important policy instrument that facilitates the mitigation of GHG emissions around
the world in a cost-effective way.
Even though the first period of application of the commitment established by the KP
ended in December 2012, there is still in 2014 great uncertainty about the future of the
GCG in the so-called post-Kyoto period between 2013 and 2020. Such uncertainty is
strictly related to the widespread criticism levied not only by the scientific community
(Boyd et al., 2009), but also by the global environmental movement (Carbon Trade
Watch, 2012), about the little contribution the carbon market has made to the two
objectives proposed by the UNFCCC: a reduction in GHG emission and the promotion of
sustainable development. According to Bumpus and Cole (2010), the projects developed
in the regulated carbon market (RCM) have led to few co-benefits favouring sustainable
development, focusing exclusively on the reduction of GHG emission and ignoring
other developing countries necessities. Thus, the carbon market has been viewed with
suspicion by some, who question its chances of succeeding and a possible political
misuse of such instrument linked to the global environmental governance (GEG)
(Giddens, 2010). They also point out its low effectiveness and extraordinary distortions
(Viola, 2009).
Additionally, the carbon market has been facing the financial crises, especially in
Europe, the biggest investor in the carbon market. The carbon credit price has been going
down, decreasing its use by the private sector. This decrease represents the reflex of the
global economic crisis of 20082009, and the subsequent reduction of the industrial
activity in some of the major economies, as well as in GHG emissions. As a result, there
was the creation of an imbalance between the demand and the supply in the main carbon
markets (World Bank, 2013). According to Streck and Lin (2008), the carbon market
showed promise of generating around 12 billion euros only in KP activities; however, in
2011, for example, only 175 million dollars was invested, 10% more than that in the
previous year (Ecosystem Marketplace, 2012). According to CDM Policy Dialogue
(2012), between 2011 and 2012 carbon prices in the CDM market had declined by 70%
(see certified emission reductions (CERs) prices (20082013) in Figure 1).
Heimdal et al. (2012) believe that with the decrease in prices, investments will further
fall until a possible complete stop in CDM transactions. As affirmed by the World Bank
(2013), this uncertainty is preventing important investments, especially from the private
 Carbon market and global climate governance 31

sector. However, the same study highlights the emergence of several national and
sub-national pricing initiatives that are trying to, among other differences, include
mechanisms to stabilise the carbon price. In spite of these new arrangements, the current
price brings doubts about the emission trading scheme effectiveness as a policy
instrument and questions about the consequences for long-term investments (World
Bank, 2013).
The development of the carbon market has been strongly affected by its economic
dimension, with little consideration of the market for its potential contribution to
development goals and to help to solve the global climate issue. As the prices are still the
main attractive, it demonstrates the insufficiency of strictly financial mechanisms to lead
the world to new sustainable and low carbon development strategies. Many studies,
among them CDM Policy Dialogue (2012) in particular, have discussed how this market
could be more effective in reaching this double objective. Other more critical studies
affirm the need for a strong reformulation in strategies and also in intergovernmental
cooperation and participation, especially in developing countries (Mattoo and
Subramanian, 2013), and the true incorporation of action that allows technology
development and transference, together with financial help to reduce the social
inequalities between nations (Andrade et al., 2009). It is imperative that developing
countries take actions to reduce the instability of the CDM market, seeking to guarantee
environmental and financial sustainability, independent of the developed countries
economy and policy decisions.

Figure 1 Certified emission reductions (CER) prices (20082013)

Source: World Bank (2013)

Considering the debates about the carbon market effectiveness as a policy instrument
and the necessity to reach the Kyoto protocol goals, it is considered to be of fundamental
importance to understand the role of the carbon market in the climate GCG, analysing the
32 A.C. Ventura et al.

limitations and challenges of this instrument for the post-Kyoto period. For this propose,
this paper seeks to discuss this issue, situating the global carbon market among
GCG mechanisms, characterising its actors and instruments, presenting some of the
predominant views in relation to its effectiveness as an instrument for climate
governance. As an innovation on the researches about the subject, we analyse the
potential of CDM market to complement the national climate change command and
control mechanisms in developing countries and we also propose some improvements for
the future decisions concerning the GCG on the post-Kyoto period. This study is part of
an interdisciplinary and multi-institutional research project about GCG and the carbon
market. This paper is based on a literature review of national and international academic
publications, as well as institutional documents from the United Nations IPCC,
UNFCCC, etc.
As for the development of the argument, this work was divided into four parts: this
introduction that gives an overview of the problem studied, followed by the second
section, in which an explanation of the theoretical basis of the GCG is presented; it also
highlights aspects of the carbon credit market; the limitations and challenges raised
throughout the discussions about the carbon market as an instrument of the GCG
are presented in Section 3 and some possible improvements for the discussions and
decision-making concerning the post-Kyoto period are given in Section 4.

2 The global climate governance: characterisation

Environmental governance is related to the participation of each and everyone in the

decisions concerning the environment. It does not involve only governmental actions.
According to Camargo (2005), it is even possible to have governance without
government and government without governance. The author states that the term
government implies the existence of a formal authority, responsible for the
implementation of institutionalised policies. Although, according to Bremer (2013),
the actual model of governance usefully reveals the diverse forms of dialogue that
constitute societys governance and the multiple institutional settings, which frame this
dialogue, enabling the disassembly of the various perspectives on mobilising knowledge
dialogically, governance refers to those activities based on communal objectives, shared
by different scales, from governmental institutions to informal non-governmental
mechanisms, and which can only work when accepted by the majority or, more
specifically, by the leading actors of a given process. de Santos (1997, p.342) asserts that
governance refers to articulation and cooperation patterns among social actors
representing a much wider scope than the state dimension, i.e., society as a whole.
Especially facing the current scenario of globalisation, it is necessary the integration
of actors for the regulation of issues with global interface, mainly regarding the
relationships among market, state and third-sector actors. Nowadays, environmental
issues are among those that have mobilised more interaction of actors on a global scale
(Comisso sobre Governana Global, 1996).
GCG might be considered a set of principles, organisations, instruments, institutions,
agencies, funding mechanisms and institutionalised rules (Cruz, 2004) related to the
climate problem. International governmental organisations, transnational companies, non
governmental organisations (NGOs), scientists, governments, companies and members of
civil society play an important role in managing environmental issues (Esty and Ivanova,
 Carbon market and global climate governance 33

2005), in which the possible agreements and coalitions depend much more on the ability
to dialogue and accept different viewpoints than on the use of force (Weiss and Pinheiro
do Nascimento, 2010). It occurs because in this kind of agreement there is no
international and global law that forces nations to adopt a specific action. Therefore,
seeking consensus and mutual cooperation is crucial. Within this context, there is a
demand for new ways of cooperation among different actors, encompassing all
organisations, political negotiations, international funding and economic mechanisms,
involving institutionalised rules for protecting the environment (Lopes, 2002).
Currently, climate change is an issue that has gained much attention and effort from
political actors related to global governance. It is at the core of global geopolitics and it
demands a competent response from the international community, especially regarding
the reduction of GHG emissions and the implementation of global measures, which
promote the transition to a low-carbon economy (Giddens, 2010). The challenges of these
changes have meant that climate science is seen as a threat to important and powerful
sectors of the global economy, because different and representative economic interests
are affected by the concept that the risk of climate change is a result of the way current
human society is organised (Abranches, 2010). Thus, GCG has become a key word in
environmental and climate resource policy. Among the characteristics that distinguish
this model of governance from the traditional policies related to the environment are:
the creation of new types of agencies and actors in addition to national governments
the creation of new mechanisms and institutions that go beyond the traditional state
decision-making
growing segmentation and fragmentation at different levels and scales (Biermann
and Pattberg, 2008).
The climate crisis was formally introduced into international negotiations during Rio-92,
with the creation of the UNFCCC. During this event, a group was formed to annually
monitor the actions related to the issue: the conference of parties (COP). Despite the fact
that the UNFCCC proved the existence of an international consensus about the need for
measures to reduce GHG emissions, the first specific goal for the countries was only
established five years later in 1997 when the Kyoto protocol (KP) was proposed (Seiffert,
2009). Among the main instruments created by KP was the carbon market, based on
market rules, involving different types of actors at varying levels going from international
decisions to national implementation strategies. The new agreement allowed the use of
three different market mechanisms to help the nations to reach their goals, as will be
explained in next section of this paper. The climate change COP completed its
18th edition in December 2012, but despite all the efforts applied so far, and the decision
to lengthen KP rules until 2020, while the new terms are being negotiated, there are still
doubts as to what will happen to the GCG in the post-Kyoto period. According to
Schrder (2012), these uncertainties are among the main reasons for the distrust in the
GCG, and especially among private investors. Some well-known issues concerning
climate change also create difficulties for the GCG, such as: the profound transformation
of habits and behaviour in some societies; the scientific uncertainty concerning
the sensitivity of the climate systems and the regional impacts and the impacts on the
ecosystems; the lack of definition as to the distribution of responsibilities and the equality
of efforts performed by the actors involved and the need for international coordination
(Meadowcroft, 2009). According to Transparency International (2012), the most
34 A.C. Ventura et al.

important decisions and responses regarding climate change would be more critically
deliberated within national and regional scenarios than in huge conferences of leaders and
States. This is because in the former scenario, more hybrid consensus would probably
arise, which would increase commitment patterns. Besides, it is necessary to recognise
that many of the human activities that contribute to global warming take place at a local
level, reinforcing the need to look at the local environment as a fundamental arena for
GCG (Martins and Ferreira, 2011).
The great challenges to the effectiveness of GCG are exactly its dependence on the
market and its instruments and on the complexity of the agents and actions and
its objectives. The GCG currently mainly involves some instruments (see Table 1).
Therefore, the conditions for local to global GCG, especially making use of all the actors
and multilateral deals, and command and control and economic instruments, are vital for
the reduction of fragmentation in the architecture of GCG, working with agents and
institutions that deal with the matter within and outside the United Nations formal system
(Comisso sobre Governana Global, 1996).

Table 1 Current composition of the global climate governance

Actors National government (of the countries in the Annex A and of the
Non-Annex A of the KP), Intergovernmental Institutions (e.g.: OECD
Organization for Economic Cooperation and Development), Non-
Governmental Organizations (registered as observers in the UNFCCC),
Scientists (e.g.: IPCC Intergovernmental Panel on Climate Change),
Private Companies
Institutional United Nations Framework Convention on Climate Change
instruments (UNFCCC), comprehending 195 countries
Kyoto Protocol (KP)
Regulation and Command and control, market and voluntary mechanisms
environmental
management
instruments
Political-Economic Regulated Carbon Market: KP Flexibilisation Mechanisms
Mechanisms (Clean Development Mechanism (CDM), Joint Implementation,
Emissions Trading)
Voluntary Carbon Market
Financial funds to combat climate change (Adaptation Fund, Fast-start
Finance, National Communications and Funds managed by Global
Environmental Fund Special Climate Change Fund, Least Developed
Countries Fund and Green Climate Fund)
Climate Technological Centre and Network
Source: Authors own (2012)

As it can be inferred from Table 1, the GCG has been supporting itself upon the three
predominant regulation and environmental management instruments in the political
institutional arena of the environment in the past decades:
1 Command and Control: representing state regulation through legal impositions to
maintain minimum standards of environmental quality. Since the 1990s, several
actors and authors (e.g., Barde and Pearce, 1991; World Bank, 1992) have criticised
 Carbon market and global climate governance 35

the effectiveness of this instrument for environmental management. Considering that

climate change represents a global problem whose solution strongly depends on
national/regional/local strategies of mitigation of GHG emission and the fact that
it is not possible to establish a global coercive norm, national and sub-national
governments are left with the task of using command and control instruments. The
KP is a general global agreement whose GHG reduction goals are specific for each
country and its reach depends on later approval of national norms. To complement
the command and control instruments, market economic mechanisms were used,
which were more compatible with the current global market economy for regulation.
2 Market Mechanisms: these economic instruments of environmental regulation are
based on the polluter-pays principle, in which the agent that caused environmental
pollution or degradation must, somehow, internalise the negative environmental
effects resulting from their activities, or compensate the people affected and the
environment. This concept has been argued about since the 1972 United Nations
Conference on the Human Environment in Stockholm (Puppim de Oliveira, 2003).
Because of globalisation, the market plays an important role in the regulation of
relationships among individuals and organisations. Within global climate change
discussions, this role is highly strengthened, notably after the creation of the carbon
market.
3 Voluntary Mechanisms: they reflect a highly competitive environment in which
actions that demonstrate some concern on the part of companies with social and
environmental issues are recognised, owing to the need of these companies to be
socially legitimated. As Puppim de Oliveira (2003) states, this voluntary auto
regulation, not imposed by formal norms present in command and control, is
represented, for instance, by certifications such as ISO 14.001 (environmental
management) and the Forest Steward Council (FSC, related to forests). As for
the Brazilian situation, the Associao Brasileira de Normas Tcnicas (ABNT
Brazilian Association of Technical Norms) already created ISO 14.065, in 2007,
which regulated the way GHG is accounted, and the ABNT NBR 15.948, in 2011,
which established principles and recommendations for the negotiation of credit in
the voluntary carbon market (VCM).
Both market mechanisms and voluntary ones represent, within an integrated analysis,
economic instruments, which are complementary to command and control instruments,
providing incentives so that organisations (and their respective nations) are able to
advance beyond the requirements demanded by the legislation. According to Puppim de
Oliveira (2003), these instruments would lead, theoretically speaking, to a more efficient
allocation of economic resources, stimulating technological improvement to favour
environmental quality. Furthermore, climate change cannot be stopped unless there is a
combination of different instruments, be they command and control or institutional ones
(Hermann, 2012). Considering the limitations of command and control strategies in a
world in which there is no real global governance, the market and voluntary instruments
appear as a complement to help to face the present challenges. However, as will be seen
in the sections below, there is still space and urgency for improvement in these
instruments.
36 A.C. Ventura et al.

2.1 Carbon market

The carbon market can be defined as an economic instrument in which emission licences
(or the right to pollute) are distributed by a regulatory organisation or the emission
reduction (offsets) generated by GHG emission reduction projects are purchased and sold
(Ecosystem Marketplace, 2011). Carbon credit negotiation places companies and private
sector among the main global strategic actors to face climate change. Companies are
considered transnational actors, described as a social actor that articulates on GCG
processes and interacts with other actors of global society (Farias and Andrade, 2014).
As stated by Okereke et al. (2012), companies and governments are concurrently being
pressured to reduce their GHG emissions and to promote sustainable development, within
an arena of profound connections between political and economic domains. So,
climate change and carbon management has gradually gained prominence within the
environmental management agendas of corporations (Kolk et al., 2008). Demonstrating a
commitment to reducing carbon emissions and purchasing carbon offsets is a way for
companies to boost their green image as an environmentally responsible company.
Thus, by its nature, carbon projects are both environmental management practices and
potential corporate social responsibility actions involving measures to GHG emissions.
Even though, there are questions about how carbon trading and carbon markets will
change company behaviour in different contexts (Deshmukh and Kane, 2012).
As explained by Souza et al. (2011), the carbon market can be divided in two
different faces: the regulate one, guided by the KP, representing an environment where its
participants are submitted to international rules (where the GHG amount to be reduced is
stipulated) and national legislation (where each country, especially those with formal
goals in KP, determines how each production sector and each actor will have to seek this
reduction) and the voluntary one, outside the KP institutional framework.
The RCM is framed by the verification that industrialised countries are undoubtedly
the main actors responsible for the historical GHG emissions into the atmosphere, and
taking into account the arguments that developing countries cannot be a match for the
developed ones, running the risk of having their own growth harmed (Conejero, 2007).
So, the UNFCCC sort the countries into categories for the establishment or exemption of
goals. The so-called Annex I is composed of 39 countries, composed of wealthy
nations, which are very similar to the group that forms the Organization for Economic
Co-operation and Development (OECD), and the countries named Economies in
Transition. Such countries have reduction goals, with fixed deadlines, to reduce an
average 5.2% gas emission between 2008 and 2012, considering the levels in 1990.
The KP also presents the so-called Non-Annex I, a category made up of developing
countries, of which Brazil is part, with no established GHG emission goals (Seiffert,
2009). As pointed out earlier, most countries participating in the KP had decided to
lengthen this term until 2020. At this moment, they are discussing new rules (among
them the market ones are the core of attentions) and goals for the so-called post-Kyoto
regime. There is a high expectation for the establishment of obligations in developing
countries, especially the emerging economies, such as Brazil, China and India.
To reach the KP goals, the GCG has created flexibilisation mechanisms which allow
the purchase and selling of CERs:
 Carbon market and global climate governance 37

emissions trading (ET), which has unleashed free trading of emission reduction
rights at a global level
joint implementation (JI), which allows countries that have goals established by the
KP to obtain emission reduction units (ERUs) that represents an equal to 1 ton
(metric) of non-CO2 (reduced or storage in sinks) through joint implementation
project, among countries of Annex B, whose aim is to reduce GHG and, finally
CDM, which is the only KP mechanism that allows the participation of developing
countries, which do not possess compulsory GHG reduction goals.
Thus, CDM is an additional mechanism to accomplish the goals used by developed
countries and their respective companies. Moreover, this mechanism is regarded as the
most striking effect KP has brought about to international negotiations as it makes it
possible to trade actual emission reduction (Seiffert, 2009). KP represents an institutional
instrument in which the participants are under national or global regulation and norms,
which establish standardised criteria and rules to conceive projects and the trading of
CER generated by CDM projects. To negotiate the credit generated by CDM projects,
it is necessary to follow a set of procedures before confirmation is granted by the CDM
Executive Board, the highest organisation in charge of evaluating CDM and granting
CERs.
In the absence of a global command and control instrument, one of the most
interesting characteristics of the RCM is the possibility of the PK stipulating obligation
goals for the Annex I countries that must be regulated and controlled in the national
levels. The agreement brings obligations to be reached by each country, specifying that
nations must create their own command and control strategies to force their companies to
reduce their GHG emissions or to negotiate the GHG reduction with other companies
around the world. This characteristic represents an important opportunity for all
countries, developed or developing, to align their sustainable development paths to the
market possibilities and strategies. Despite this, according to CDM Policy Dialogue
(2012), until now most developing countries have not linked their national strategies to
their CDM possible projects and many developed countries with mitigation targets have
not linked their goals to CDM use.
The participants of the RCM are consultants, auditors, brokers, project developers,
speculators, among others whose aim is to provide liquidity to carbon credit trading,
but with different interests (Paiva et al., 2014). The negotiations of carbon credit purchase
and selling are done through retailing deals among the parts. For a contract to be entered
into, it is necessary that a company that owns CERs from CDM projects transfer them,
or officially binds itself to transfer them, as a seller, and the buyer (companies or
government, members of KP) pay the corresponding agreed amount (Lorenzoni Neto,
2009). According to Conejero (2007), CER purchase is performed, in general, in a very
similar way to purchase done in the commodities market. There are also investment
operations in projects of such nature, carried out by companies from developed countries,
which focus on obtaining carbon credit to make up for exceeding emissions. This
mechanism represents a market tool seeking to balance economic development and
environmental protection, through CER negotiations. In spite of these possibilities, many
limitations of this marketing tool incorporated into GCG mechanisms are making
governments, private investors and financial institutions lose confidence in the CDM
market (CDM Policy Dialogue, 2012).
38 A.C. Ventura et al.

On the other hand, the VCM can be seen as an economic instrument in which the
rules and norms concerning project elaboration and approval emerge from market agents.
Here, the GHG emission reduction projects are subordinated to International Standards,
which establish their own rules (Souza et al., 2011). Carbon credit negotiation, namely
verified emission reduction (VER), is performed by different agents, such as
governments, companies, NGOs and individuals (de Simoni, 2009), who are not subject
to KP norms. Consequently, the interests in participating in this market are diverse.
According to Bayon et al. (2009), the VCM has an innovative and lower-cost logistic in
comparison with the RCM. Gillenwater (2007) adds that the acquisition of VCM credit is
economically rational in situations in which reducing emissions caused by ones own
activity is more expensive. Paying someone to pollute less can be wiser than reducing
ones own pollution, not only for the buyer, but also for the society as a whole, because a
greater amount of emissions might be reduced for a given resource expense.
In the VCM, the concern of the investors and buyers lies on the management of
companies impact in relation to climate change, their image, reputation, interests in
technological innovations to reduce GHG, legitimacy, necessity to prepare themselves
for future regulations and carbon credit reselling plans profiting from the trade
(Instituto Brasileiro de Relaes com Investidores, 2009). Hence, the attractiveness of
these markets is directly associated to the credibility these companies acquire before
their stakeholders, through socialenvironmental responsibility actions, to reach a good
position in the markets they perform in as well as increase their competitive advantage in
relation to their competitors.
According to the Instituto Carbono Brasil (ICB, 2010, p.01), within this market
schemes are financed by organisations and individuals who want to neutralise the impact
of the emissions produced by their activities. Thus, among the projects developed in the
carbon VCM, there are projects that use small-scale methodology, not economically
feasible in the RCM; projects that do not meet the CDM criteria and projects that have
already computed retroactive credit, i.e., credit that was computed even before the project
was registered at the UN (de Simoni, 2009).
Bumpus and Liverman (2008) argue that project developers or retailers who act
within the VCM have fewer bureaucratic rules, compared with the RCM, because the
organisation of the VCM results from actions of the trading agents and carbon credit
sellers themselves. This is because it is through participants interactions that the rules
that guide the trading among them the IS emerge and the negotiation processes are
standardised based on the deals that emerged during the transactions and not on a specific
treaty or law.
It is important to highlight that, even though some companies make use of the VCM
as a means to obtain carbon credit or test their project, which has sometimes been
submitted to the RCM and is waiting for validation and approval, these companies are not
allowed to use the same credit for compensation purposes twice. This recycling of
carbon credit, namely double accounting, already caused some chaos in the European
market in 2010, when the Hungarian government traded 2 million tons of CO2eq with an
English organisation twice (Carbonpositive, 2009). Such failures lead to mistrust on the
part of the leading actors in the market and directly affect the credibility of the negotiated
VER (Pasishnyk, 2010). The failures are associated with the measurement, inspection
and accounting characteristics of emission reduction, essential to the offset market.
Nevertheless, with the establishment of the International Standards, owing to the
 Carbon market and global climate governance 39

mobilisation of the participant actors of this market, rules were agreed upon to convey
the necessary credibility for the market to work effectively.
Each IS determines a set of criteria for project crediting, which function as guidelines
for the proponents, to guarantee transparency and credibility. Thus, for a project to be
approved and registered in the carbon VCM, it is necessary to follow the steps of
the project validation cycle, which is normally less bureaucratic and expensive than the
one in the RCM.
Unlike the RCM, the rules for the design of GHG emission reduction projects in the
VCM are not unique. It is observed that each IS establishes a distinctive set of rules.
Among the rules established by ISs are: elaboration of the project following a model
design document; all GHG emission reduction must be proved/measurable/quantifiable;
reduction must be permanent, i.e., the project must continuously reduce GHG emissions
that had been discharged up until then into the atmosphere and projects must follow the
additionality principle (Souza, 2012).
Once an overview of the global carbon market and its modalities was set, an analysis
of the confrontation of the complexities, limitations and challenges of this structure
within the GCG arena is carried out.

3 Limitations and challenges of the carbon market as an instrument

of global climate governance

According to Silva Junior (2011), since the creation of the carbon market, international
trading relations have been intensified, involving selling agents, credit holders and buyers
interested in purchasing this credit. Several business opportunities have emerged,
generating profitable perspectives for the companies, individuals and the environment,
besides contributing to reducing corporative risks associated to climate change (Labatt
and White, 2007). Moreover, more specifically concerning the RCM, there is investment
by developed countries in developing ones, which should cause economic and
technological benefits, assisting in technology transfer and sustainable development.
This leads some authors to believe that the Kyoto protocol might bring about great
innovations to combat climate problems, through the market (Lombardi, 2008). From this
perspective, the regulated or VCM aims for GHG reduction and consequently the
promotion of sustainable development and technology transfer, creating opportunities for
economic, environmental and social improvement in the countries hosting the projects.
In contrast, Barrett (2009) believes that KP and its mechanisms have created very
modest innovation processes, because facing climate change requires a real technological
revolution. The main reason for these few innovations would be the fact that the carbon
market works with short-term goals, which do not motivate bigger investments and risks.
Research and development require long-term investment to enable the participating
companies to acquire true capacities in the environmental field, creating what Li et al.
(2012) call a knowledge-based view of cluster.
Despite the fact that the carbon market has created opportunities for technological
innovation in developing countries (project hosts) and new environmental management
strategies, it has been constantly criticised. This has posed several challenges to the GCG
regarding the establishment of new deals after the deadline of the settled agreement.
In reality, not only has KP been criticised, but, as pointed out by Okereke et al. (2012),
there has been a lot of conflict concerning political discussions and discussions about
40 A.C. Ventura et al.

productive activities related to clean technologies, renewable energy, electric vehicles,

low carbon constructions and capture and storage of carbon worldwide.
As far as the KP is concerned, the first criticism is the non-participation of the United
States of America (USA), the greatest polluter at the time, who refused to sign the deal
arguing that their companies and economic development would be harmed. Despite the
absence of EUA in the GCG instruments, it is important to highlight that several sub-
nationals initiatives, e.g., California carbon market, were created. Other sub-national
initiatives were elaborated in other developed and non-PK participating countries, as
Quebec carbon market, in Canada, and even in an emerging economy as So Paulo and
Rio de Janeiro carbon markets, in Brazil.
Additionally, according to Bremer (2013), when looking at the nature of knowledge
for environmental governance, the actors act in an instrumentally rational manner and
this scientific paradigm has gained prominence throughout the enlightenment and it is
now the most valid form of knowledge for modernist resource management. However,
the author argues that knowledge is plural and should be considered the value-positions
within a political arena.
Second, there were no established compulsory emission reduction goals for
developing countries, e.g., China, the second largest economy in the world nowadays
(Veiga, 2010). Barrett (2009, p.1) states that the absence of the USA is the main failure in
the KP. According to this author, the actions taken so far to solve climate change
problem have failed. This is due to the fact that it is not possible to guarantee that the
goals agreed upon by the countries will be effectively reached. Despite being a regulatory
instrument, the KP does not establish any penalty, and it does not possess any command
and control instrument in case any of the parts does not honour its commitment or leaves
the group. During COP 17 in Durban, Russia, Japan and Canada decided not to take part
of the second period of the KP, and no penalty whatsoever was applied, exposing some
weakness of this instrument as a GEG mechanism.
As regards the carbon negotiations made possible by the KP, Barrett (2009)
asserts that mechanisms like CDM create a perverse incentive. For the producers,
it is economically more interesting to acquire CERs than effectively reduce their
emissions. Such an opinion is reinforced by Bozmoski et al. (2008), saying that it is
cheaper for countries to meet their commitment through the reduction that takes place in
developing countries. Besides, three of the GHG HFCs, PFCs and SF6 were already
controlled by the Montreal Protocol. Therefore, it would be more effective to control
and, at length, even eliminate, the production of these gases by strengthening the
Montreal Protocol than allowing their reduced production through the Kyoto protocol
(Barrett, 2009).
It is observed that, in fact, CDM is the most criticised mechanism in the climate GEG
(Ventura and Andrade, 2011). This is due to its little existing contribution to promoting
sustainable development in developing countries, which is the second goal of CDM
(together with emission reduction itself), as pointed out by several authors such as:
Bozmoski et al. (2008) and Sutter and Parreo (2007). For these authors, CDM projects
fail to promote sustainable development mainly because of the existing geographical and
sectoral concentration, favouring richer regions and end-of-pipe technologies, but little
innovative and cleaner technologies that promote effective transformations towards
a low-carbon economy. One of the most important reasons for failing to promote
sustainable development is that the Designated National Authority (DNA) in each
country is in charge of defining the criteria for a CDM project to be regarded as a
 Carbon market and global climate governance 41

promoter of sustainable development. After DNA approval, there is no specific

verification or monitoring regarding questions of sustainability in the projects. Hence,
CDM development goals ought to be better defined to fit the global agenda for social and
environmental sustainability.
It is also important to highlight the existing regional inequality regarding carbon
market projects. For reasons, such as lack of institutional capacity and of focus on
investment related to the climate, countries with severe social and environmental
problems are not gaining this financial benefit (Bozmoski et al., 2008). According to data
from United Nations Environment Programme (UNEP, 2012), 81% of CDM projects are
allocated in Asia and the Pacific, 13.9% in Latin America and only 3.1% in African
countries. In relation to this, Andrade et al. (2006) argue that among the problems faced
by the carbon market as a market instrument to attenuate climate change in developing
countries are the necessity of reduced scale and the distribution of the rights to use the
goods and environmental services, which the authors call use of GHG assimilation
capacity (Andrade et al., 2009, p.4). They highlight the fact that it is necessary to avoid
a scenario with fair distribution, but inefficient allocation. Efficient allocation might be
obtained if a country with a high cost of emission reduction meets its emission reduction
goal in a country where the cost is much lower.
Researchers point out that CDM projects show failures in relation to the inequality
of the distribution of the projects and suboptimal choice of these projects (Bozmoski
et al., 2008, p.22). For them, this distribution failure indicates governance problems,
which represent exactly the processes through which transnational decisions that affect
CDM and development are made, implemented and coordinated. As for the voluntary
market, since it is an instrument in which the rules emerge from the actors involved,
without a regulatory structure like the KP, failures in credibility pose a threat to this
instrument. For Bayon et al. (2009), the criticism refers to the lack of transparency,
equality and registration in these markets.
According to Michaelowa (2012), the fragmentation of the carbon market can lead to
solutions that are adjusted just to specific circumstances and necessities, and not to the
global climate problem. Therefore as a financial instrument, the carbon market has a
contradictory element: as GHG mitigation is a global issue, a global command and
control instrument that regulates the strategies to be adopted is necessary. Projects would
seek not only the cheapest way to reach an emission reduction goal, but also a sustainable
development strategy with less carbon use.
Despite the price crises in the carbon market and the criticisms about its ability to
promote more efficient technologies and sustainable development, some authors and
actors sustain that there is an important space for this market in GCG strategies.
Mota and Tega (2013), for instance, examine the role to be developed by small and
microcompanies, through innovation and technology transference that truly incorporate
the sustainability factor. For the authors, this kind of project is gaining more investor
attention, especially for voluntary projects. This is because the International Standards in
the VCM made bigger demands for concrete benefits for the places where the projects are
being developed.
Recognising the actual limitations of the regulation market, especially because there
is a poor demand for these credits in a global financial crisis scenario, the CDM Policy
Dialogue (2012) see the carbon market as an opportunity for nations to reach their
emission goals in a flexible and cost-efficient way. The study affirms that the carbon
markets can both increase the cost-effectiveness of mitigation activities and at the same
42 A.C. Ventura et al.

time facilitate the adoption of more ambitious targets, helping the world to find better
solutions for the climate problem. It is necessary that the new financial instruments that
are being negotiated for the post-Kyoto agreement incorporate four main requirements:
nations must increase their mitigation ambition, adopting goals that really
incorporate the environmental critical moment
the international community must adapt CDM to new political and market conditions
reform in the operational procedures, seeking effective GHG reductions and
sustainable development promotion
new governance structures that allow transparence and efficient organisation.
These new requirements could be reaching by complementing CDM mechanism with
climate change command and control policies on national and sub-national levels. Brazil,
e.g., decides to put its voluntary reduction GHG emission goals into its climate change
command and control national law.

4 Final considerations

This paper sought to characterise the global carbon market as the main political-economic
instrument of the GCG and discuss the necessity of increasing the participation of CDM
in national or sub-national climate change command and control policies, especially in
developing countries. From this analysis, it was possible to recognise that climate change
requires a global response, based on a shared understanding of the goals to achieve in the
short, medium and long term among all GGC actors, and also based on international,
national and sub-national levels of policy decisions and mechanisms. We have identified
several limitations of using almost exclusively market mechanisms to achieve this,
and it is necessary to encourage a better integration between these instruments and the
command and control and voluntary ones.
From this perspective, it is possible to make some suggestions for improving GGC in
the post-Kyoto period:
Need for new GCG settings to align financial incentives linked to the carbon
market to development priorities worldwide. One way to accomplish this would be to
compensate the excess risk in specific types of projects or indeed in some countries,
adjusting the price of traded carbon certificates. For example, the authors suggest
the stipulation of a differentiated value (higher) for renewable energy projects and
also projects in countries perceived as less developed (least development
countries LDCs, according to United Nations designation).
A stipulation by the UNFCCC of a minimum CER quota to be acquired for projects
and priority countries, such as sub-Saharan Africa. The authors also suggest that
some requirements of VCM projects must be incorporated into the policies of the
RCM. Thus, a minimal contribution to sustainable development would become part
of the scope of CDM and other RCM projects.
 Carbon market and global climate governance 43

Improvement in the global carbon market, based on the guidelines presented by the
Nairobi Framework (NF), to promote effective conditions of development for LDCs.
The NF is an initiative of the United Nations Development Programme (UNDP),
UNEP, World Bank, African Development Bank and the UNFCCC secretariat,
to assist these countries to participate effectively in the market global carbon,
especially through building capacity. Thus, it is expected that financial resources
and technology transfer that can be acquired via carbon market can assist not only in
obtaining a low carbon development, but also allowing the creation of efficient
adaptation strategies.
Valuation of mitigation strategies submitted voluntarily by developing countries
through their nationally appropriate mitigation actions (NAMAs). These initiatives
represent national actions that are, or intend to be, undertaken by these countries to
mitigate their emissions. As the UNFCCC (2012) warns, it is necessary to define
how they will support (financial, technological and capacity building for the
implementation of NAMAs).
Adoption of multilevel GCG strategies that may be adopted at all levels of
government action, unfolding from consensual decisions at the international level,
to reach the effective action at the local level. It is necessary that all nations in the
world, irrespective of their degree of development, incorporate mitigation strategies
into their development plans and actions. Obviously, these actions cannot be
restricted to market-based instruments, as the limitations and concerns already
raised. Thus, the GCG future should create opportunities for the development and
implementation of environmental management strategies that include market tools,
but with the necessary improvements to ensure more ambitious emission reduction,
the promotion of sustainable development and the incorporation of developing and
less developed countries. The market strategy must be associated with governments
and companies voluntary strategies along with local and global civil society ones,
as well as with command and control instruments at national level.
Despite the extensive literature review presented in this paper, supported by critical
analysis of researchers from various areas, especially from social and political sciences,
it is necessary to recognise the limitations of this work in progress. The most important
limitation of this paper is the absence of field research with policy-makers interviews,
seeking to understand the other limitations and challenges of the role of the carbon
market in the national and sub-national climate change command and control policies.
The development of future studies that focus on the reality of each particular country,
e.g., Brazil, which adopted global voluntary GHG emission reduction targets, still needs
to implement its national climate change legislation to promote a low carbon sustainable
development.

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