European Management Journal Vol. 25, No. 6, pp.

415–427, 2007
Crown Copyright Ó 2007 Published by Elsevier Ltd. All rights reserved.
0263-2373 $32.00
doi:10.1016/j.emj.2007.08.001

A Framework for
Understanding
Institutional
Governance Systems
and Climate Change:
The Case of Australia
ANDREW GRIFFITHS, UQ Business School, Australia
NARDIA HAIGH, UQ Business School, Australia
JENINE RASSIAS, UQ Business School, Australia

In this paper it is proposed that different institu- Introduction

tional governance systems bring different climate
change outcomes for nations. Furthermore, it is
The need to address climate change issues has become
argued that these institutional governance systems
more pressing as mounting evidence from the scien-
impact on the ability of public policies, industries
tific community demonstrates the affect of anthropo-
and corporations to adopt and transform their activ-
genic greenhouse gas (GHG) emissions on climate
ities to meet issues associated with climate change.
change (Houghton et al., 2001; Khandekar et al.,
We propose that there is a relationship between dif-
2005). This scientific imperative is reflected in emerg-
ferent governance systems and climate change out-
ing literature in the management and public policy
comes in terms of the institutional framework,
fields which outlines the need for corporations to
policies developed, capabilities developed to inno-
respond and adapt to issues relating to climate change
vate and speed of adaptation. The case of the Aus-
(Hoffman, 2005; Kolk and Pinkse, 2005). Commenta-
tralian approach to climate change is used to
tors have argued that climate change, or ‘‘. . .any
highlight the responses that occur in political and
change in climate over time, whether due to natural
institutional environments characterised by a plu-
variability or as a result of human activity. . .’’
rality of actors and the difficulties associated with
(Houghton et al., 2001, p. 984), has become a critical
developing a coherent national response.
matter for business and economic systems (Waller-
Crown Copyright Ó 2007 Published by Elsevier Ltd.
Hunter, 2004). In addition to climate change brought
All rights reserved.
about by Earth’s geographic dynamics, such as
changes in weather patterns (Fairbridge, 1969) which
Keywords: Institutional governance systems, Sus-
itself has displaced or destroyed entire civilizations
tainability, Climate change, Australia
(Schwartz, 1957), we now face increasingly frequent
and severe weather associated with GHG emissions
(Khandekar et al., 2005; Raddatz, 2003). This has
resulted in the pressing need for national govern-
ments to act to reduce their greenhouse gas emissions.

European Management Journal Vol. 25, No. 6, pp. 415–427, December 2007 415
A FRAMEWORK FOR UNDERSTANDING INSTITUTIONAL GOVERNANCE SYSTEMS AND CLIMATE CHANGE
Despite the overwhelming need to respond to cli-
mate change issues, significant variations in how
nations and industries respond are apparent. For
instance, Denmark and Germany have responded
differently to the challenges of climate change and
greenhouse gas reductions compared to Australia
and the United States (Hoffman, 2005; Kolk and
Pinkse, 2005). In other words countries that have
signed and committed to the Kyoto Protocol have fol-
lowed a different range of strategies at a national
level to those that have not. These national commit-
ments have created an environment where dialogue
and need for action are then translated into distinct
sectoral and corporate strategies. In the case of the
US and Australia – where national institutional
arrangements have encouraged the pursuit of status
quo, this has meant that actions on climate change
and greenhouse gas reductions have been left to vol-
untary initiatives by business in the context of dis-
putes between a plurality of parties and differing
industry and environmental stakeholders. This paper
seeks to understand how it is that different national
institutions shape and influence approaches to
addressing the issue of climate change? This paper
therefore proposes that differences in institutional
governance systems impact on, shape and are
shaped by corporations and industry responses to
climate change. An institutional governance system
is defined as the configuration of state and private
organizations and institutional arrangements that
impact on and create the mechanisms by which eco-
nomic and social outcomes within nations are pro-
duced (Griffiths and Zammuto, 2005). Furthermore
it is argued that these variations can not be totally
explained by factors at a firm level or industry level
(Hoffman, 1999). This paper contributes to a growing
literature that examines corporate strategies for
achieving greenhouse gas reductions but goes fur-
ther by examining the link between climate change
response and the institutional environment. It also
provides insights into the role that institutional gov-
ernance systems play in transforming these activities
in response to climate change by using the case of the
Australian approach to greenhouse gas reduction
and emission trading.
Industrial Competitiveness and Climate
Change Response
The paper builds on a conceptual framework that
synthesises a large and diverse body of literature
explaining differences in the roles of various institu-
tional governance systems in the process of industry
transformation (Griffiths and Zammuto, 2005). The
framework primarily sought to explain variations
in national competitiveness outcomes. In this paper
the framework is extended to examine variations in
climate change approaches. There are two major
bodies of theory and research focusing on the trans-
416 European Management Journal Vol. 25, No. 6, pp. 415–427, December 2007
formation of national industries and firms - the stra-
tegic management and political economy literatures
(Biggart and Guillen, 1999). The strategic manage-
ment perspective is largely firm-centric while the
political economy literature is primarily state-centric
in orientation.
The strategic management literature’s view of the
generation of competitive advantage and industry
transformation is labelled as firm-centric because it
focuses on the relative influence of industry structure
and firm characteristics as drivers of firm perfor-
mance (Barney, 1991; Chandler, 1966; Porter, 1980,
1985, 1990). For the most part the explanation for
competitive outcomes focuses on firm resources,
capabilities and strategies (Oliver, 1997; Schoemaker
and Amit, 1993) or on meso-level industry character-
istics and structures (McGahan and Porter, 1997).
The management literature in general ignores the
state as a variable for explaining variations in firm
and industry performance. This is despite a range
of studies that suggest that country conditions and
characteristics are important determinants of firm
performance (Christmann et al., 1999; Thomas and
Waring, 1999) and that state and social institutions
can impact on business group formation and eco-
nomic outcomes (Biggart and Guillen, 1999; Rao
and Singh, 2001).
The state-centric political economy literature argues
that national governments and institutions play an
important role in fostering the competitive capabili-
ties of industries and firms (Mathews and Cho,
2000; Nelson and Winter, 1982; North, 1990; Skocpol,
1985). Studies from this tradition are concerned with
explaining rapid industrialisation in east Asia, partic-
ularly Japan, Korea and Taiwan, and with isolating
the state capacities and institutional configurations
that support such rapid economic development
(Evans, 1995; Mathews, 2002). In contrast to strategic
management research, these studies suggest national
governments play an active role in generating the
institutional governance systems that support and
encourage national competitive advantage (Streeck,
1991) through mechanisms of coordinated adjust-
ment (Amsden, 2001; Best, 2001). Recent research
also suggests that when it comes to climate change
that national differences emerge due to structural
characteristics of economies and industries and the
national policy positions adopted that link climate
change with economic development (Griffiths and
Winn, 2005).
These two literatures are generally treated as
competing explanations of the ability of firms and
industries to transform activities in response to com-
petitive pressures. The strategic management litera-
ture embodies the ideals of free enterprise – that
the most competitive economies result with minimal
state intervention; with climate change being pur-
sued as a consequence of individual corporate strat-
egies – voluntarism (Hoffman, 2005). In contrast, the
 A FRAMEWORK FOR UNDERSTANDING INSTITUTIONAL GOVERNANCE SYSTEMS AND CLIMATE CHANGE

political economy literature argues that managed ties and decision making and by market forces on the
economies can result in the best competitive out- other. The resulting quadrants define four institu-
comes, with climate change adaptation and mitiga- tional governance systems, which it is argued in this
tion being the result of institutional intervention paper, characterise patterns of industry engagement
such as regulation. with climate change activities. The characteristics of
each quadrant are described below. Table 1 provides
This paper ventures to treat these perspectives as a summary.
parallel and complimentary explanations of how
decision making around climate change should be Market Governance: Market governance systems are
managed and to explore how these then shape gover- characterised by fragmented value chains and a
nance systems approaches to mitigation and reduc- low level of state involvement in industry decision
tion of greenhouse gases. In this context, the making. Under this institutional governance system,
strategic management literature indicates that the market forces are used to achieve adaptation (Best,
economic coordination of activities and decision 2001; Streeck, 1991). Consequently, resources are dis-
making occurs either through market forces or tributed to those firms and industries that are most
through value chain integration. Therefore decisions profitable (Porter, 1990), and competition between
regarding climate change and sustainability issues groups and domestic rivalry leads to innovation-
more generally are left to a) a minimum compliance based outcomes (McGahan and Porter, 1997). In
position; b) capabilities and activities associated with other words, the use of market forces encourages
individual firm choice and c) voluntary initiatives firms to develop the appropriate capabilities associ-
(Hoffman, 2005). By contrast, the political economy ated with capitalising on resource access and factor
literature suggests that economic coordination and endowments. Climate change approaches are seen
decision-making occurs either through market forces as a cost rather than an opportunity, and institutional
or state involvement. Therefore the state may play a governance systems focus on protecting access to
larger role in shaping climate change outcomes, but resources (Griffiths and Zammuto, 2005). For
these are generally subservient to social and eco- instance, in Australia, coal companies and industries
nomic considerations. Thus viewed, these two per- associated with the production of energy from coal,
spectives become orthogonal dimensions sharing lobby significantly for financial compensation and
one end point rather than opposing ends of the same for protection from a range of measures associated
continuum. See Figure 1. with the introduction of carbon taxes and emissions
trading schemes. Such a governance system has char-
The framework proposed here is based on two acterised much of the national debate on climate
dimensions that broadly represent underlying change in Australia. While Canada has committed
themes about the coordination of economic activities to Kyoto, its energy sector lobby groups have also
and decision making within industries. Representing sharpened their attack on the commitment to Kyoto
the strategic management perspective is a dimension at a national level as an appropriate framework for
anchored on one end by value chain integration, achieving emissions reductions. Critics of this
where economic decision making and coordination approach note that a reliance on organisational capa-
is achieved through managerial hierarchies and, on bilities alone is insufficient to maintain country
the other, by market forces. The political economy industrial competitiveness, particularly if the indus-
perspective is represented by a dimension anchored try focuses on low value-added activities (Streeck,
on one end by state involvement in economic activi- 1991), competes for finite resources at the detriment
of value-adding outcomes (Lazonick and Gibson,
1983), and has industry value chains that are highly
atomistic (Streeck, 1991). Furthermore, the gover-
Four Institutional Governance Systems nance institutions that evolve demonstrate an inabil-
Political Economy Perspective ity to intervene in industry value chains (Griffiths,
Coordination Through
1998; Weiss, 1998). Therefore when it comes to
approaches to climate change issues, this governance
Strategic Management Perspective

State Involvement

system has the following characteristics:

Value Chain Integration
Coordination Through
Coordination Through

State Joint
Governance Governance 1. A reliance on minimum compliance standards.
Market Forces

Corporations are encouraged to achieve these

compliance standards and therefore view sustain-
Market Corporate
Governance Governance
ability initiatives as a cost. Climate change issues
and reductions in greenhouse gases are ignored.
2. If corporations pursue individual corporate climate
Coordination Through change activities, these are a consequence of mana-
Market Forces
gerial choice. In other words for the main part capa-
bilities around climate change and greenhouse gas
Figure 1 Four Institutional Governance Systems. mitigation are left to the development prerogative
Source: Griffiths and Zammuto, 2005. of individual managers and corporations.

European Management Journal Vol. 25, No. 6, pp. 415–427, December 2007 417
A FRAMEWORK FOR UNDERSTANDING INSTITUTIONAL GOVERNANCE SYSTEMS AND CLIMATE CHANGE

Table 1 Sustainability Characteristics of the Four Governance Systems

Market Governance Corporate Governance State Governance Joint Governance

Characteristics
Value chain Fragmented Integrated Fragmented Integrated
State involvement Low Low High High
Coordination of decision Market forces Corporations through State State/corporate
making relating to climate Individual corporate managerial hierarchies In negotiation collaboration
change activity – voluntary Reliance on with unions,
voluntary actions employers,
green groups

Climate change outcomes Low and fragmented Low/Moderate Dictated High/High Moderate/High
by corporate strategy
Institutional capabilities
State involvement in Low/Minimal, protection Low/Intervenes to High/Corporatist High/Corporatist style
industry governance of resource access; address threats to style structures structures to bring key
a site of dispute between major resources that to bring key economic players
industry groups may impact on players together, together,
powerful lobby groups negotiated outcomes transformational
capabilities
Corporate involvement in Low – focus on High – focus on Low High
industry governance on compliance and an voluntary initiatives
climate change attempt to maintain
the staus quo
Rate of climate change Slow/Firm specific Fast/Firm-specific Slow Fast/Future-oriented
innovation (Rate/Focus) and patchy diffusion (consensus- capabilities that
building)/Industry enhance industry
enhancing – diffusion sustainability
widespread in activities – export
industry clusters driven
Conditions of best fit
Speed of adjustment to Slow, if adjustments Fast for individual Slow initially but Fast
sustainability challenges are made – reactionary firms – slow for leads to fast
collective industry adoption after
groups extended
negotiation periods
Stakeholder adjustment Weakest members of Weakest members Costs of adaptation Costs of adaptation
the value-chain bear of the value-chain are distributed are distributed across
the costs of industry bear the costs of across industry industry participants,
adaptation. In this case, industry adaptation participants, focus on ‘‘growing
specific community focus on ‘‘sharing the pie’’
groups or natural the pie’’
resources
(Adapted from Griffiths and Zammuto (2005)).

3. Corporations and industries may engage in cli-
mate change activities as a consequence of volun-
teering to take part in industry or government
sponsored sustainability programs.
4. The main focus of corporate and industry activity is
to lobby and influence government outcomes and
to protect access to resource issues. Costs in this
system tend to be distributed to the politically pow-
erful and effective interest groups. Corporations
may attempt to sway political debate and focus
on costs of adjustment – such as the loss of eco-
nomic growth and employment as a consequence
of addressing greenhouse mitigation issues.
Corporate Governance: The second quadrant highlights
the importance of the industrial corporation and its
internal capabilities as an important institutional
governance system. Figure 1 characterises such insti-
tutional arrangements as having integrated value
chains with little state involvement in the industry’s
economic activities (Griffiths and Zammuto, 2005).
Using Chandler’s work (Chandler, 1966), one of the
key characteristics of such a system is the use of man-
agerial hierarchies to integrate value-adding activi-
ties such as the linking of systems of supply,
production and distribution to generate competitive
advantages (Griffiths, 1998). Another key characteris-
tic is that corporate institutional governance systems
enshrine competitive markets with the result that
governments are reluctant to become involved in
competition between firms. In other words emphasis
on climate change issues and in particular attempts

418 European Management Journal Vol. 25, No. 6, pp. 415–427, December 2007
 A FRAMEWORK FOR UNDERSTANDING INSTITUTIONAL GOVERNANCE SYSTEMS AND CLIMATE CHANGE
to deal with greenhouse gas reductions are left to
individual corporations and self monitoring systems.
If intervention, such as the creation of carbon trading
markets evolve, it is anticipated that firms take place
in these activities as a result of attempts to reduce
their risk; improve their reputational performance
or seek to access carbon trading markets elsewhere.
The corporate governance approach to climate
change is related to and similar to that of the market
governance approach. The United States is represen-
tative of this type of institutional governance system,
with an emphasis placed on corporate and market
led responses and solutions to climate change in
the absence of a coherent national policy framework.
It has the following characteristics:
1. An overall reliance on corporations to take the
lead role in effecting climate change and corporate
social responsibility outcomes through their eco-
nomic endeavours. They may be influenced by
markets, loss of reputation, shareholder activism
– but they are not led by a coordinated role under-
taken by the state.
2. A focus on corporations using their supply chains
and capabilities to create dynamic competitive
advantages and capabilities from their climate
change activities. For instance energy retail com-
panies may encourage their transforming and gen-
erating companies to pursue greenhouse gas
reductions and mitigations strategies.
3. The use of corporate activity to influence and deter-
mine a range of policies and practices – including
minimum standards, access to resources, pollution,
energy reduction and waste control. In other words
corporations may shift polluting activities to other
locations where rules and criteria are not as
stringent.
4. As with the market governance approach, the
development of capabilities around climate
change and broader sustainability issues are left
to individual corporate choice.
5. Diffusion of knowledge on climate change and
mitigation approaches are left to corporate activity
and based on the competitive soundness of the
sustainability innovation.
State Governance: The third quadrant covers those
institutional governance systems that are corporatist
and neo-corporatist in orientation, which are charac-
terised by a fragmented value chain and state
involvement in industry decision making. The state
plays a role in negotiating and structuring outcomes
between significant groups in society—state, labour,
capital and green groups (Goldthorpe, 1984). How-
ever, states tend not to intervene in value chain activ-
ities, which are left to market forces and the actions of
managerial hierarchies. As Hancock (1991) argues,
corporatist regimes rely on extensive private owner-
ship; however, they also rely on public and private
measures designed to institutionalise structural adap-
tation to changing domestic and international eco-
nomic conditions. The state actively encourages the
European Management Journal Vol. 25, No. 6, pp. 415–427, December 2007
ecological modernisation of industry through negoti-
ated and state led targets and policies. In other words,
the state governance quadrant illustrates the influ-
ence of politics in the sphere of markets. Hence we
could expect to see a great deal of internal variation
within Europe on how individual states negotiate
outcomes and goals on climate change activities. For
instance, the approaches taken by Netherlands and
Sweden vary greatly in terms of how they operation-
alize and address climate change issues. However
while the state encourages ecological modernisation
of industry, climate change goals take place within
a broader framework of economic and social priori-
ties. The characteristics of this system include:
1. The use of state sponsored forums and national
goals to bring major stakeholders together to
determine and work towards achieving climate
change targets – such as through trading schemes
and carbon taxes.
2. The establishment and setting of regulatory targets
for individual industries and the implementation of
individual corporate reporting requirements.
3. The ecological modernisation of industry and
society by implementing national level policies
on pollution, waste management, recycling and
dematerialisation.
4. To encourage industry to invest in the skills and
capabilities of its workforce in order to develop
sustainability oriented products and services that
can be used in export markets.
5. The encouragement of industries to shift out of
polluting activities or to shift these polluting activ-
ities to other countries and or regions.
Joint Governance: The fourth quadrant, joint gover-
nance, describes approaches to national industrial
transformation where the state is involved in industry
decision making and industry value chains are inte-
grated. In other words, these institutional governance
systems can intervene in the economy (Calder, 1993),
encourage broader systems of product and process
innovation and encourage economic and industrial
learning (Amsden, 2001; Mathews, 2002). Such an
approach appears to characterise German national
responses to the impact of climate change on indus-
try. The major elements of the joint governance
approach to national industrial competitiveness and
the obtainment of climate change goals include:
1. A reliance on a mixture of large and small pri-
vately owned firms to adopt innovative practices
to reduce their own ecological footprint, but also
to develop innovate technologies, services and
products that create export led climate change
solutions;
2. Public/private sector research initiatives that
focus on generating new products and services
and seek to leverage climate change opportunities
for these organisations;
3. Government regulatory agencies designed for
coordination of these activities. They rely on a
419
A FRAMEWORK FOR UNDERSTANDING INSTITUTIONAL GOVERNANCE SYSTEMS AND CLIMATE CHANGE
combination of targets, regulatory compliance but
seek through the use of dynamic feedback to cre-
ate new climate change opportunities;
4. The development of inter-organisational struc-
tures that cross government and industry divides
– in order to encourage the free flow of informa-
tion, the diffusion of climate change innovations
within the nation and as a means of updating
mature sectors of the economy and moving or
adjusting to a ‘carbon constrained world’.
Climate Change Responses: The Case
of Australia
The Kyoto Protocol was adopted on 11 December
1997 (United Nations, 1997) and entered into force
on 16 February 2005. It reaffirms the objectives and
principles of the UNFCCC, and specifies legally
binding targets which commits Parties to limit or
reduce their greenhouse gas emissions levels. The
main feature of the Protocol is the requirement that
Parties included in Annex 1 (including developed
and industrialized nations) ensure that they meet
agreed greenhouse emissions targets (United
Nations, 1997, Article 3 of the Kyoto Protocol. These
targets are set in relation to 1990 emissions levels for
the specified commitment period of 2008–2012.). The
target set for Australia was 108% of the 1990 emis-
sions level, due to its dependence on fossil fuels
(Jones, 2002). Most other countries were required to
reduce 1990 emissions levels by about 5% (United
Nations, 1997, Annex 1 of the Kyoto Protocol).
The mechanisms designed through the Protocol to
assist nations in achieving emissions reductions
included: firstly, the establishment of an emissions
trading regime which enables Parties to buy and sell
allocated emissions permits as a means of achieving
emissions levels; secondly, allowing Annex 1 Parties
to transfer emissions reduction units to or acquire
emissions reduction units from other Annex 1 Parties
in order to achieve emissions targets (United
Nations, 1997, Article 6); thirdly, allowing parties to
record ‘‘net changes in greenhouse gas emissions
from sources and removals by sinks resulting from
direct human-induced land use change and forestry
activities. . .’’ (United Nations, 1997, Article 3(3));
and finally, allowing development of clean develop-
ment mechanisms which encourages Parties to
implement emissions reductions projects in non-
Annex 1 countries and then have the projects
counted towards meeting emissions targets (United
Nations, 1997, Article). In other words, the Kyoto
protocol provided a comprehensive range of mecha-
nisms that enabled differing national institutional
governance systems a means by which to address cli-
mate change activities – through a mix of public pol-
icy, industry innovations and changes in corporate
level strategy via the creation of a market value for
carbon.
420 European Management Journal Vol. 25, No. 6, pp. 415–427, December 2007
In this section, it is argued that the Australian Gov-
ernment’s approach to addressing the issue of cli-
mate change, has for the most part been ad hoc
and to develop a national response to climate change
and its impacts outside of International Law (i.e.
Kyoto protocol). This section argues that in the
absence of a National uniform regulatory framework
to control and contain greenhouse gas emissions,
there will continue to be an ad hoc and inconsistent
approach to the issue of climate change which will
fuel economic uncertainty and achieve little, if any,
actual emissions reductions. The Australian case is
used as an example of an institutional governance
system associated with market governance. That is,
an institutional governance system that is character-
ized by a high degree of plurality between differing
levels of government; a high degree of competitive-
ness between stakeholders that seek to influence
the climate change debate in order to protect or
‘win’ resources for their status quo position, and
with a national policy framework based on volunta-
rism, that generates a policy vacuum that hinders
widespread innovation and creates uncertainty over
large scale energy investments. The rest of this sec-
tion sets out the chronological order of Australia’s
national policy response, followed by an analysis of
the energy sector and the plurality of differing state
led initiatives to address climate change in the
absence of a coherent national policy response.
The Australian Government ratified the UNFCCC on
30 December 1992. The principles espoused in the
Convention still underpin many of Australia’s strate-
gic and policy initiatives in relation to greenhouse
gas emissions. The National Greenhouse Response Strat-
egy (NGRS) was released in 1992 as a strategic tool
for Australia’s long term commitment to climate
change (Jones, 2002). Up to this point, the debate
on climate change in Australia seemed set and Aus-
tralia joined discussions and negotiations on the
Kyoto Protocol.
However, in 1997, Australian public policy on climate
change altered significantly, with the Commonwealth
government’s refusal to ratify the Kyoto Protocol,
arguing that it did not provide an effective long term
method of reducing greenhouse gas emissions. In
particular, the Commonwealth Government argued
that without the participation on the USA, India
and China, the Kyoto Protocol was unworkable, and
that ‘‘an effective global framework to address cli-
mate change needs to include commitments from all
major emitters’’ (Hare, 2001). It also disagreed with
the exclusion of developing countries from the
requirement to reduce greenhouse gas emissions
(Department of Foreign Affairs and Trade, 2006).
The refusal to ratify the agreement was taken despite
the fact that Australia was given significant conces-
sions that took into account its reliance on fossil fuels.
In place of the Kyoto Protocol, the Commonwealth
government introduced in 1998 the National Green-
 A FRAMEWORK FOR UNDERSTANDING INSTITUTIONAL GOVERNANCE SYSTEMS AND CLIMATE CHANGE
house Strategy (the NGS). The NGS stresses the need
for an integrated approach to climate change by
Commonwealth, State and Local governments and
promotes industry and community participation in
addressing climate change (Commonwealth Govern-
ment, 1998). The basis of this strategy was for
organizations to voluntarily improve their energy
efficiency, develop sustainable land use practices
(and carbon sinks) and to promote best practice
approaches to greenhouse gas emissions (Horn,
2001). This was to be undertaken on a voluntary basis
and ignored setting price mechanisms – such as a
carbon taxes or emissions trading schemes – and pro-
vided little in the way of industry adjustment to
reduce industries carbon reliance. The NGS called
on all levels of Government to implement initiatives
(voluntary) which encourage a reduction in the reli-
ance on greenhouse gas producing technologies
and develop ‘‘carbon sinks’’ to offset greenhouse
emissions.
An example of the type of voluntary programs advo-
cated by the Commonwealth government included
the Greenhouse Challenge (1995 to 2005) and its new
program the Greenhouse Challenge Plus (2005–pres-
ent). These programs encourage businesses to adopt
initiatives which reduce the impacts of greenhouse
gas emissions and climate change. For instance, com-
panies involved in the program undertook energy
audits, purchased green energy options and sought
to offset emissions from their car fleets. These pro-
grams are non-legislative programs which rely on
voluntary compliance and financial inducements.
As such companies are not rewarded or penalized
for achieving or failing to achieve targets. They have
become sources of corporate reputation performance
– however the uptake by major corporates has been
lacking. It has been argued that initially, the Green-
house Challenge was supported by business and in
particular the coal lobby, as a means of avoiding a
‘‘Carbon Tax’’ and other regulatory initiatives which
could increase costs.
However, increasing evidence has emerged that
these voluntary and market led initiatives have not
led to a significant reduction in greenhouse gas emis-
sions. For instance, it is estimated that to prevent the
adverse impacts of global warming, Australia must
achieve a reduction in greenhouse gas emissions lev-
els of 60–80% over the period 1990 to 2050, which
equates to a reduction on between 1 to 1.5% per
annum over the 60 year period (Sullivan, 2006).
However, adopting the current national frameworks,
it appears at this point, that Australia is nowhere
near realizing this level of emissions reductions. In
fact, emissions levels were about 10% above 1990
emissions levels in 2000 (Sullivan, 2006). Given these
continued high emissions rate, it is uncertain as to
whether the existing regime can achieve emissions
levels specified in the Kyoto Protocol despite Com-
monwealth Government assurances that Australia
is on target.
European Management Journal Vol. 25, No. 6, pp. 415–427, December 2007
In February 2006, the Council of Australian Govern-
ments (COAG) announced that it would adopt a new
national Climate Change Plan of Action and establish a
‘‘high-level inter-jurisdictional Climate Change
Group to over see the implementation of the Plan’s
recommendations’’ (Council of Australian Govern-
ments, 2006). Although there appears to be some
urgency in COAG’s communiqué, aside from restat-
ing Australia’s commitment to the UNFCCC in rela-
tion to ‘‘preventing dangerous human interference
with the climate system’’(Council of Australian Gov-
ernments, 2006), there is still no indication that a
national uniform regulatory regime to control green-
house gas emissions levels will be developed in the
short term.
Similarly, the Australian Business Roundtable on Cli-
mate Change 1 has released its Report to Government
urging early intervention on the issue of climate
change arguing that delaying action will increase
costs to business and the economy. In particular,
the Roundtable Recommendations include to
‘‘design a long, loud and legal framework to estab-
lish a price signal’’ which will set short term emis-
sions targets to ensure transition to a low-carbon
economy (Australian Business Roundtable on Cli-
mate Change, 2006, p. 7). Meeting this short term
goal is seen as fundamental to achieving the long
term ‘‘goal for Australia to significantly reduce
greenhouse gas emissions as our contribution to a
global effort designed to avert dangerous climate
impacts’’ (Australian Business Roundtable on Cli-
mate Change, 2006, p. 7).
Therefore, in line with a market based institutional
governance systems, we saw the emergence of a
group of proactive companies arguing that there is
an economic case for industrial adjustment to
address climate change issues. This was in contrast
to the coal and energy lobby that had been highly
resistant to a carbon tax of national emission trading
scheme that would damage the economic underpin-
nings of those industry sectors. The Business Round-
table of Climate Change pointed out that the current
approach in Australia meant that emissions targets
were voluntary and piecemeal, with little consistency
between jurisdictions. They provide more weight to
calls for the Australian Government to intervene, ie.
via the creation of carbon trading markets, and
thereby, provide certainty for business and commu-
nity investment.
Unfortunately, as demonstrated in the Australian
case, government strategy on climate change alone
has been insufficient to provide certainty to an issue
which many corporations are reluctant to accept
given the potential costs attached to changing exist-
ing practices. It appears that a clear regulatory frame-
work – which coordinates national, state and
industry level institutions – is required if any sub-
stantial reduction in Australia’s levels of greenhouse
gas emissions levels is to be realized.
421
A FRAMEWORK FOR UNDERSTANDING INSTITUTIONAL GOVERNANCE SYSTEMS AND CLIMATE CHANGE
The recent weight of these initiatives – from environ-
mentally progressive corporations; the reports into
carbon trading by the state governments and even
the calls for investment certainty from the energy
and coal lobby groups – has seen a change in govern-
ment position and policy on emissions reduction and
carbon trading. The Australian Government still
argues that the impact of climate change can be
reduced through initiatives more suited to Austra-
lia’s economic and geographical position, rather than
by setting emissions targets (Australian Government,
2005). In other words, climate change can be
addressed through a range of voluntary measures
undertaken by corporations and individuals whilst
the Commonwealth supports research into carbon
capturing technologies. Although in recent months
the Federal government has also changed its policy
position – forming its own review to examine the
possibility of Australia developing and taking part
in an international emissions trading scheme.
Consequently, given the recent nature in the change of
the debate on climate change in Australia, the Austra-
lian Government has indicated that it is willing to
negotiate alternative agreements aimed at addressing
climate change. For instance, Australia is a member of
the Asia-Pacific Partnership on Clean Development and
Climate which aims to address energy security, cli-
mate change and air pollution issues 2. Despite Aus-
tralia’s move to side with the United States on this
issue, without a commitment to the Kyoto Protocol,
Australia cannot participate in its International car-
bon trading scheme. Given increased industry and
corporate concern over the inability to participate in
carbon trading markets, along with the uncertainty
generated for large scale investments in renewable
technologies and other energy investments, the Aus-
tralian Commonwealth government commissioned a
business task force to examine the creation of an emis-
sions trading market. In response to these issues, the
Prime Ministerial Task Group on Emissions Trading
was established in 2006 and has made strong recom-
mendations for Australia to create/join an emissions
trading market for 2011. The institutional governance
system that characterizes Australia’s approach to cli-
mate change appears to be in flux – shifting slowly
from a system of market governance to a system more
characterized by a corporate governance approach to
climate change.
However, the changes in direction at a national level,
mirror changes that have occurred at a state govern-
ment level. The next section uses the electricity indus-
try to highlight the plurality of differing approaches
in the absence of a coherent national policy.
The Electricity Sector
The electricity industry is the single biggest producer
of greenhouse gases in Australia (Australian Green-
422 European Management Journal Vol. 25, No. 6, pp. 415–427, December 2007
house Office, 2002). Microeconomic reform and com-
petition have served to make electricity cheaper for
consumers, thus increasing demand. While some
regulatory initiatives have been undertaken to
reduce the reliance of the energy sector on coal, this
area remains of critical importance to the realization
of reductions in greenhouse gas emissions. A Nation-
ally uniform regulation of the electricity sector would
enhance emissions reductions and provide certainty
to the industry and consumers. In this section, it is
firstly demonstrated that regulations regarding
energy efficiency and renewable energy targets vary
across jurisdictions and secondly, the differing
approaches to the use of carbon sequestration to off-
set carbon emissions.
The Renewable Energy (Electricity) Act 2000 (Cth) pro-
vides that, by 2010, an additional 2% of Australia’s
electricity must be produced from renewable energy
sources. This amount was intended to be in addition
to any existing alternative energy sources. This initia-
tive has resulted in additional investment in hydro-
electric schemes (Lyster, 2004).
The States have also been involved in developing
strategies to reduce greenhouse gas emissions from
energy providers. For example, Queensland
amended the Electricity Act 1994 (Qld) and the Elec-
tricity Regulation 2006, to provide that 13% of electric-
ity produced in the State must come from natural gas
(Queensland Government, 1994). 3 It achieves this
through the development of a certificate based
scheme where electricity retailers must purchase a
percentage of their electricity from accredited gas
generators of electricity.
New South Wales and the Australian Capital Terri-
tory have the Greenhouse Gas Abatement Scheme
(GGAS) which operates under the Electricity Supply
Act 1995 (NSW). GGAS provides a mandatory green-
house gas benchmark which must be met by all elec-
tricity sector participants in NSW. Benchmarks levels
are established in accordance with market share of
NSW electricity demand (Greenhouse Gas Abate-
ment Scheme, 2006). 4 Participants in the GGAS
meet allocated benchmark level by surrendering
abatement certificates created from emission reduc-
tion activities. Failure to surrender enough abate-
ment certificates to meet the mandatory benchmark
will result in a penalty being imposed. The current
penalty for failure to comply is $11 per tonne of
shortfall (Greenhouse Gas Abatement Scheme,
2006). This is Australia’s only initiative that provides
a regulatory requirement that greenhouse gases be
reduced. It is limited to the electricity sector of
NSW and the ACT.
Finally, the National Green Power Accreditation Pro-
gram has been established jointly between the gov-
ernments of South Australia, NSW, Victoria,
Queensland, Western Australia and the ACT. This
program has been credited with achieving the major-
 A FRAMEWORK FOR UNDERSTANDING INSTITUTIONAL GOVERNANCE SYSTEMS AND CLIMATE CHANGE
ity of Australia’s renewable energy production
(Lyster, 2004). It is a non-legislative scheme. These
initiatives act independently and provide a regula-
tory and policy regime that is inconsistent between
jurisdictions and incapable of providing wide-rang-
ing or systematic change.
The second area that highlights the plurality of
approaches in a market based governance system
can be seen by the variety of approaches to offsetting
emissions via carbon sequestration. Essentially, car-
bon sequestration occurs because, as plants grow,
they remove carbon dioxide from the atmosphere.
If more carbon dioxide is removed than is released
in an area of vegetation, this is known as a ‘‘carbon
sink’’. 5
The development of carbon sinks has been promoted
by the Commonwealth even though there are no
national legislative arrangements. Notably, the NGS
identified the development of carbon sinks as a key
area within the overall strategy to reduce greenhouse
gas emissions. Despite this, the Commonwealth Gov-
ernment had, until recently, ruled out introducing a
National carbon trading scheme (CRC Greenhouse
Accounting, 2003). However given political pressure
and the overwhelming evidence of the costs of cli-
mate change, this position is currently under review.
Regardless, most Australian States have developed
legislation that recognizes carbon sequestration as a
commodity, thus establishing the foundation of a
National carbon trading system. These legislative
regimes are not uniform between States, with two
main approaches to recognizing the ownership of
carbon rights being developed (Jones, 2002). These
are the profit a prendre approach, which has been
adopted in Queensland, NSW, South Australia and
Tasmania, and the introduction of statutory carbon
sequestration rights, which has been introduced in
Victoria and Western Australia (Lim and Giskes,
2004, p. 12). A profit a prendre is the creation of a
right to take something off another person’s land or
to take something out of the soil or the natural pro-
duce of the soil 6. What has essentially happened in
jurisdictions adopting this approach is that the defi-
nition of ‘‘forestry rights’’ has been extended to
include carbon sequestration rights (Jones, 2002). 7
In NSW, amendments to the Conveyancing Act 1919
(NSW) has established a framework which recog-
nizes carbon sequestration rights and forestry rights
as a profit a prendre. Accordingly, this allows the
carbon sequestrated from trees to be traded (Lim
and Giskes, 2004, p. 13). Amendments have also been
made to the Energy Services Corporations Act 1995
(NSW) has enabled energy companies to deal and
trade in carbon sequestration rights through the
GGAS program and amendments for the Forestry
Act 1916 (NSW) enables the Forestry Commission
of NSW to participate in the scheme (Lim and Giskes,
2004, p. 13).
European Management Journal Vol. 25, No. 6, pp. 415–427, December 2007
In Queensland, the Land Title Act 1994 (Qld) and the
Forestry Act 1959 (Qld) provide a profit a prendre
mechanism to operate of freehold and leasehold
land. The Queensland Government stated that this
regime:
‘‘enable[s] investors . . . to register their interests in trees
established on someone else’s land. . . Land holders can
use this system to sell interests in trees without having
to sell the land the trees are growing on, and without hav-
ing to fell the trees. This makes it possible to trade in
immature plantations.’’ (Lim and Giskes, 2004, p. 7).
In addition, the Vegetation Management Act 1999 (Qld)
aims to reduce clearing of remnant vegetation for the
purpose, among other things, of reducing green-
house gas emissions 8.
South Australia’s Forest Property Act 2000 (SA) and
Tasmania’s Forestry Rights Registration Act 1990 (Tas)
also establish profit a prendre systems.
By contrast the regimes in Western Australia and
Victoria recognize the ownership of carbon seques-
tration rights. The Forestry Rights Act 1996 (Vic) and
the Carbon Rights Act 2003 (WA) recognize the right
to commercially exploit carbon sequestered by trees
(S.3 Victoria) and establish and recognize carbon
rights where a carbon right form has been registered
(section 5, WA). Notably, the Carbon Rights Act dif-
fers from the profit a prendre system because it does
create an interest in land in relation to the effects of
carbon sequestration from, and carbon release to,
the atmosphere. 9
As States negotiate the possibility of a national car-
bon trading arrangement, the different legislative
approaches and State-based interests are taking prec-
edent over the need to reduce Australia’s greenhouse
gas emissions. For example, the Victorian Govern-
ment does not wish to introduce a carbon trading
scheme that would adversely affect its own brown
coal industry (Planet Ark, 2006). Similarly the Fed-
eral government has given research dollars to the
coal industry to investigate and pilot carbon capture
and sequestration technologies. Some states such as
Queensland have also contributed to research by
the large coal mining companies into carbon seques-
tration. Significant debates has also emerged over the
prospect of the introduction of a nuclear power
industry. This had generated conflict between differ-
ent sectors and industries in the Australian economy.
The coal industry for instance wants public funds
directed into research into clean coal technology
whilst several of the large resource companies see cli-
mate change and emissions reduction as an opportu-
nity for Australia to expand its uranium mining
capacity and increase the prospects for the establish-
ment of a ‘clean’ nuclear enrichment and power
industry. Furthermore, it appears that as these issues
become more central to political debates, that
green and other environmental groups have been
423
A FRAMEWORK FOR UNDERSTANDING INSTITUTIONAL GOVERNANCE SYSTEMS AND CLIMATE CHANGE
marginalized as large corporations seek to influence
the design and structure of any carbon tax or emis-
sions trading scheme. This further supports the need
for the Australian Government to introduce manda-
tory greenhouse gas emissions levels, which, to
enable industries to maintain competitiveness, could
include a carbon trading mechanism. This highlights
the plurality and fragmented approach under an
institutional governance system that places compet-
ing interest groups ahead of broader national envi-
ronmental goals.
Discussion and Conclusion
It has been proposed in this paper that the institu-
tional governance systems framework expands our
understanding of the response of national industries
to climate change issues by focusing on the intersec-
tion of state and industry activities to coordinate
decision making and economic activity. An institu-
tional governance system is not just government
involvement in an industry or just industry structure,
but something that incorporates both.
It has been argued in this paper, that in order to
understand variations in climate change approaches,
that it is important to understand how a national
governance system helps shape industry and corpo-
rate activities in response to the challenges of green-
house gas reductions. The framework developed
suggests that neither firm nor state-centric explana-
tions can account for variations in responses to trans-
forming industry systems in response to climate
change issues. In other words, attempting to explain
differences in climate change response by purely an
emphasise on firm level capabilities – or even
national level policies – leaves a void in understand-
ing why it is that some governance systems may
seem to generate better sustainability outcomes.
The institutional governance system framework’s
contribution is that it identifies the firm/industry-
level and state-level characteristics of each governance
system which, in turn, facilitates comparison across
the different patterns of industry engagement with cli-
mate change. These comparisons starts the process of
enabling us to examine the conditions under which
particular institutional governance systems are likely
to succeed or fail, and to develop a more sophisticated
picture of both an industry’s and the state’s roles in
fostering or hindering the transformation of industries
in response to climate change issues.
The institutional governance framework, as applied
to the Australian case, shows that the patterns of
industry and firm adaptation differ across the gover-
nance systems with respect to the relative speed with
which adaptation occurs and who within a society
bears the cost of adaptation. This is particularly
important given the difficulties that climate change
424 European Management Journal Vol. 25, No. 6, pp. 415–427, December 2007
issues present to some industries. States that are
not involved in industry decision making rely on
market forces or minimum compliance approaches
to structure industry adaptation to climate change –
the case of Australia. In Australia, we saw that the
national government had a national strategy to deal
with climate change - in keeping with an institutional
governance system characterised by market gover-
nance. However this strategy was reliant upon vol-
untarism by industry and corporations and did not
require mandatory targets in energy efficiency or
emissions reduction. Furthermore, it enabled indi-
vidual state governments to develop their own tar-
gets for renewable energy use and protect state
economies at the expense of national objectives. For
industries and corporations, this meant that they
may have to achieve different renewable targets if
they were operating in different jurisdictions and
also emboldened powerful lobby groups – such as
the coal sector – to influence policy decisions.
The institutional governance system characterised by
market governance proved quite reactive and slow
given the absence of a national emissions target strat-
egy and carbon price mechanism. Consequently, the
short term costs of adaptation under the market gover-
nance and corporate governance institutional systems
are borne by those groups that are pluralistically or
politically weak—either labour, environmental
groups or those that are in a disadvantageous position
(community groups) or occupy a weak place in the
supply chain (the tourism industry as opposed to the
coal industry ). However, there is a question of the rel-
ative long term costs of each pattern of adaptation.
Further research is required to understand how insti-
tutional governance systems develop the capability to
structure the adaptation process as climate change
conditions change. For instance, there has been a
recent and sudden shift in the institutional gover-
nance system in Australia, as the national govern-
ment has made commitments to implement a cap
and trade carbon trading scheme after 2011. The
development of such a system has now become the
battleground for lobby groups and major carbon
emitters. Particularly, there has been a shift by the
major mining and energy users to influence the crea-
tion and design of such a market. On the other side, it
has signalled to business groups that they have an
adjustment period to implement efficiencies to reduce
their carbon emissions and encourages them to find
innovations in technology and investment. Similarly,
the shift in institutional governance systems, via the
creation of a national framework for emissions trad-
ing, will create the conditions that will reduce differ-
ences between the individual state governments
renewable energy targets and carbon sequestration
strategies, thereby reducing corporate uncertainty.
Research is also needed to determine whether differ-
ent institutional governance systems enhance the
long term innovative and knowledge capital of indi-
 A FRAMEWORK FOR UNDERSTANDING INSTITUTIONAL GOVERNANCE SYSTEMS AND CLIMATE CHANGE
vidual firms within an industry. For instance will
firms that exist in state governance and joint gover-
nance approaches develop more value added
approached to climate change, that become the basis
of new business models?
This paper raises several interesting challenges and
questions over the structure and response of gover-
nance systems to climate change issues. How do
institutional governance systems break out of path
dependencies and develop capabilities that enable
them to shift and adjust their response to changing
climate change? Do changing industry conditions
(i.e., technological innovations, deregulation, indus-
try globalisation, changes in the ease of resource
flows across borders, emergence of trading blocks)
force states and industries to rethink the extent of
cooperation in their relationships and in industry
structure? What impact does global climate change
issues have on the speed and pace of industry and
firm transformation?
There is the question of whether this framework
applies at the industry or state-level of analysis.
While Biggart and Guillen’s (1999) analysis suggests
that social institutions are likely to have a homoge-
nous effect on industry development within a nation,
there can be significant variation in the governance
systems across a nation’s industries. Even if we
assume that the nature of state-industry relations is
fixed across industries within a given state, there is
considerable variation in the degree of value chain
integration across industries. Moreover, there are
likely to be significant variations in the relative
power of value chain members across industries.
For instance, stakeholder groups such as green
groups may have a significant impact on governance
system development in a traditional industry, such
as mining, but less impact in newer industries like
information technology.
Furthermore, the institutional governance system
framework proposed here, enables managers to
understand why it is that different nations, with
competing jurisdictions of government (federal,
state) generate different policy and industry out-
comes. Whilst this provides managers with difficul-
ties in managing complexity it also provides them
with an understanding of strategies that they can
pursue to influence desirable policy outcomes. For
instance, part of the resilience of the coal industry
in Australia has been its effective ability to lobby
governments to attract resources and desirable policy
outcomes. This framework enables us to understand
the process by which this occurs.
Finally, the institutional governance framework
allows the internal differences between industries
within a country to be examined as well as differ-
ences across countries. The approach proposed here
enables such dynamics and their outcomes to be
explored rather than determined a priori.
European Management Journal Vol. 25, No. 6, pp. 415–427, December 2007
Notes
1. The Business Roundtable is comprised of BP Australia, AIG,
Origin Energy, Swiss Re, Visy Industries and Westpac. The
Australian Conservation Foundation also worked with the
Roundtable and research was provided by the CSIRO and
Allen Consulting Group.
2. Other members of the partnership are China, India, Japan,
Republic of Korea and the USA.
3. The objects of Chapter 5A of the Electricity Act 1994 are ‘‘(a)
reduce the growth in greenhouse gases associated with electricity use
in the State; and (b) contribute to the diversification of the State’s
energy mix towards the greater use of gas in electricity generation;
and(c) encourage the development of new gas sources and gas
infrastructure to meet the State’s future energy requirements’’.
4. This system commenced on 1 January 2003 in NSW and 1
January 2005 in the ACT.
5. State Forest of NSW; Forest Facts; Generating Carbon Benefits for
Public and Privately Owned Forests,http://www.for-
est.nsw.gov.au, accessed 25 April 2006.
6. Australian Softwood Forests Pty Ltd v Attorney-General (NSW); Ex
Rel Corporate Affairs Commission (1981) 148 CLR 121 at 130. See
also Corporate Affairs Commission v ASC Timber Pty Ltd (1989) 18
NSWLR 577 for definition of profit a prendre.
7. See for example, theForestry Act 1916 (NSW); section 33C.
8. Vegetation Management Act 1999 (Qld); section 3(1)(g).
9. Carbon Rights Act 2003 (WA), p. 1. This Act commenced on 24
March 2004.
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continues. The OECD Observer 242, 30–31. the Economy in a Global Era. Polity Press, Cambridge.

ANDREW GRIFFITHS, NARDIA HAIGH, UQ

UQ Business School,
The University of
Queensland, Qld 4072,
Australia, E-mail:
a.griffiths1@uq.edu.au
Dr Andrew Griffiths is an
Associate Professor in the
UQ Business School.
Andrew’s areas of research
include: business strategy
and climate change, corpo-
rate sustainability strategy and change. His work has
been published in leading international journals,
including The Academy of Management Review and the
Journal of Management Studies.
JENINE RASSIAS, UQ
Business School, The
University of Queens-
land, Qld 4072, Austra-
lia.
Business School, The
University of Queens-
land, Qld 4072, Austra-
lia.
Nardia Haigh is a Ph.D.,
Student at The University
of Queensland Business
School in Brisbane,
Australia. Nardia’s work
focuses on investigating
how firms respond to
sustainability issues and identifying strategic vulner-
abilities. In particular, her Ph.D, is complementing
organization theory and strategy by investigating how
electricity firms are making sense of and respond to
climate change issues, while identifying climate
change-related vulnerabilities within the electricity
supply industry.

Jenine Rassias, is a Senior

Treasury Officer with
Queensland Treasury. She
has Master of Commerce
and recently completed a
law degree majoring in
environmental law. Her
areas of research include environmental law, carbon
sequestration and emissions trading.

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