Carbon Market Crossroads: New Ideas for Harnessing Global Markets to Confront Climate Change
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Transcript of Carbon Market Crossroads: New Ideas for Harnessing Global Markets to Confront Climate Change
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Carbon Market Crossroads
New Ideas or Harnessing Global Markets to Conront Climate Chan
Nigel Purvis, Samuel Grausz, and Andrew Light April 2013
www.americanprogress.o
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Carbon Market CrossroadsNew Ideas or Harnessing Global Markets
to Conront Climate Change
Nigel Purvis, Samuel Grausz, and Andrew Light April 2013
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Contents 1 Introduction and summary
3 Legacy of global carbon markets
4 Transformational change
11 Carbon-market shortcomings
13 Resolving the legacy
17 Current state of carbon markets
17 Market threats
19 Policy responses
23 The way forward
23 Increase ambition
31 Policy innovation
34 Conclusion
35 About the authors
37 Endnotes
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1 Center or American Progress | Carbon Maret Crossroads
Introduction and summary
Scieniss now believe ha absen a major change o course, he plane will warm
4 degrees Celsius by 2100.1 Climae change on ha scale would rigger severe
economic, environmenal, and social disrupions. Te global communiy would
become more racured and unequal han oday, and human suering on an
unprecedened scale could ensue, according o he World Bank.
Naions are negoiaing in he Unied Naions a new global climae agreemen,
bu ha reay may no ener ino orce unil 2020. While such an agreemen isessenial, he inernaional communiy mus ramp up climae acion nowno
a he end o he decade. Simulaing much sronger climae acion would require
creaing real poliical willa sense o purpose ha simply does no exis oday.
Alhough no a panacea, his repor examines he conribuionsglobal carbon
markesdened here as he buying and selling o climae-change securiies
earned by reducing greenhouse-gas emissions in developing naionscould make
o increasing he worlds ambiion in addressing climae change.
o dae, global carbon markes have played a key role in acceleraing climae
acion while mobilizing billions o dollars in privae-secor invesmen, encourag-
ing economic growh, and helping o alleviae povery. Tese markes have spread
he revoluionary idea ha all counries and communiies bene rom ghing cli-
mae change and ha domesic policies such as pricing carbon make economic
sense. In he process, however, hese markes have ailed in serious ways including
giving credis or quesionable emission reducions and creaing slow and opaque
approval processes ha have been arnished wih apparen conics o ineres.
Te worlds larges carbon markes, moreover, ace severely collapsed prices and a
crisis in condence. Bu hese ailures and crises should no obscure he markes
more imporan legacy and opporuniies or impac.
Wih he righ poliical commimen and much-needed reorms, global carbon
markes have he poenial o deliver ousized environmenal and economic ben-
es in he coming years. o harness hese benes, he inernaional communiy
should ake he ollowing concree acions.
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2 Center or American Progress | Carbon Maret Crossroads
Over he nex ew pages, we describe he legacy o inernaional carbon markes.
We hen discuss where hose markes are likely o go in he coming years and how
he above-menioned recommendaions can urher make use o inernaional
carbon markes o gh climae change.
TABLE 1
Summary of recommendations
Recommendation Action
1 Emergency climate summit The World Bank and the International Monetary Fund should
convene a meeting o world leaders at the end o 2013 to agree on
new measures to avert a climate catastrophe with a strong emphasis
on using carbon markets.
2 Invest in carbon markets Countries should make a political commitment to increase demand
or global carbon-market credits, either by setting up a market-
stabilization und or by pledging to purchase a minimum quantity o
credits rom developing nations.
3 Responsible energy Countries should ensure responsible development o necessary ossil
uels by carrying through on past pledges to eliminate harmul ossil-
uel subsidiesredirecting some o the revenues to global carbon
marketsand by requiring oil companies to set aside revenues or
drilling in new and high-risk areas to support carbon markets.
4 Strengthen climate goals
through markets
Europe should encourage other countries to take more ambitious
climate action by committing to reduce its emissions 45 percent
below 1990 levels by 2030 and meeting that commitment in part
through global carbon markets.
5 Empower consumers Socially responsible technology entrepreneurs should capitalize
on public concern over climate change by using social media and
innovative online marketing to help consumers directly nance
emission reductions abroad.
6 International carbon market
coordinating body
Countries should establish a new body to encourage prolierating
carbon markets to converge on the same high standards and to help
nations link these markets.
7 Governance reorms Carbon-market regulators should undertake reorms to improve
their credibility, including increasing transparency, creating appeals
mechanisms, streamlining approvals, and adding environmental
saeguards.
8 Learning-by-doing Countries should use carbon markets to enable learning-by-doing bypioneering scaled-up market transactions covering entire economic
sectors rather than small projects only.
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3 Center or American Progress | Carbon Maret Crossroads
Legacy of global carbon markets
Over he pas decade mos news sories abou inernaional carbon markes have
been excepionally negaive. A 2012 ron-page headline rom Te New York imes
is perhaps ypical: Pros on Carbon Credis Drive Oupu o a Harmul Gas.2
Similar sories alleging raud, ineciency, and conics o ineres in he global
carbon markes have run in Te Wall Street Journal, Te Washington Post, Te
Financial imes, and Te London elegraph.3
No surprisingly, his unatering coverage has led many inormed observers obelieve ha inernaional carbon markes are aally awed and environmenally
damaging. While some o he criicisms have meri, hey obscure a ar more iner-
esing, surprising, and imporan se o ruhs: Inernaional carbon markes have
had an exraordinarily posiive impac on global climae acion, while delivering
imporan susainable-developmen benes or local communiies. Tese markes
represen perhaps he single-mos-imporan policy innovaion since inernaional
climae cooperaion began more han 20 years ago.
Wha drives his gap beween percepion and realiy? Climae policy and carbon
markes have only recenly emerged, and as a consequence, people nd i hard o
place hem in he larger picure. In oher areas o modern lie, where we have more
direc personal experience, we can pu crises in perspecive and call or argeed
responses. We reac o massive home morgage raud, or insance, by demanding
beter regulaion and accounabiliy raher han calling or an end o home mor-
gages. We undersand ha Ponzi schemes and excessive risk aking on Wall Sree
require more ransparency and beter oversigh raher han rejecing nancial mar-
kes alogeher. We undersand he benes o each o hese sysemsha mor-
gages have helped hundreds o people achieve heir dreams o home ownership
and ha uncioning capial markes have spurred economic growh and raisedliving sandards around he world. In oher words, we can place hese scandals in
an appropriae conex. Ye when i comes o innovaive climae soluions such as
inernaional carbon markes, we lack ha broader conex and hereore jump o
unwarraned conclusions.
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For much o he pas decade, global carbon markes have been synonymous wih
he Clean Developmen Mechanism, or CDM. Tis mechanism launched around
2005 wih he Kyoo Proocolhe global legally binding agreemen o emission
reducions nalized in 1997 and reauhorized in December 2012 or anoher eigh
years. Te CDM enables emission-reducion projecs in developing naions o sell
carbon securiies o developed-counry polluers. Under he mechanism, developed-counry purchasers are allowed o ose heir emissions and developing-counry
sellers gain new invesmen, echnologies, and livelihoods. Te CDM has been he
primary global credi issuer wih is credis represening 88 percen o globalcarbon-
marke ransacions in 20044 and 95 percen in 2011.5 Tese gures, o course, don
include larger regional carbon-marke ransacions such as Europes emissions-rading
program. Te remaining balance o global ransacions involves credis rom he oher
smaller carbon markes creaed under he Kyoo Proocol or credis creaed by privae
issuers known as he volunary marke. Tese volunary ransacions are no par o
he Kyoo Proocol and hereore are no subjec o is mandaory emission limis.
Transformational change
Global carbon markes, mos noably he Clean Developmen Mechanism, have
helped o accelerae climae acion around he world. Tey have, moreover, simul-
aneously mobilized billions o dollars in privae-secor invesmen, encouraging
economic growh and helping o alleviae povery. Tese somewha unconven-
ional claims deserve careul analysis.
Accelerating new climate action in developing nations
Inernaional carbon markes have helped developing counries discover heir own
poenial o abae climae polluion, which in urn has encouraged and enabled hese
naions o adop more ambiious climae policies. Te CDM has suppored 6,556
carbon marke projecs and $356 billion in invesmens in emission reducions.6
Tese projecs have helped o creae housands o climae enrepreneurs and elici
millions o dollars in governmen spending on climae policies and beter climae
regulaors. Tese projecs have also rained a much broader group o sakeholdersand communiies o organize around carbon-marke projecs and advocae or emis-
sion reducions. Indeed, each o he 10 developing naions ha paricipaed mos
acively in global carbon markes over he pas decade are oday ou ron experi-
mening wih new, more ambiious climae policies, as illusraed by Figure 1.
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Why is he correlaion beween experience wih he CDM and climae-policy
leadership so srong? o be sure, here was some degree o sel-selecion.
Counries wih he poliical will and capaciy o lead on climae change also had
he abiliy o make he mos ou o he CDM. Ye ha is no he enire sory. By
empowering businesses, governmens, and communiies, carbon markes have
helped o accelerae he imporan acions by hese counries.
FigurE 1
Carbon markets and climate action
Top developing-country carbon market project hosts and their new climate policies
1,000+
100-999
50-99
10-49
1-9
0
Number of CDM projects
Major climate action
Developing a market
Sources: UNEP Risoe Center, Vietnam Bridge, US Climate Action Network, Searle, Helmy7
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China bes demonsraed he posiive ransormaional impac o he Clean
Developmen Mechanism. Afer a cauious beginning, China embraced he CDM
and soon became is larges projec supplieraccouning or 52 percen o hemarke in 2012.8 o dae, China has hosed 3,480 projecs worh $220 billion in
invesmens.9 Te huge volumes o CDM projecs helped Chinese companies
become amiliar wih clean echnologies such as wind power and capuring meh-
ane rom landlls.10 China now has more wind-elecriciy generaion capaciy
TABLE 2
Relationship between carbon-market experience and new climate action
Country
Number
of CDM
projects
Investments
supported ($
billions) Climate action
1 China 3,048 $202.2 Seven municipal and regional emissions-
trading systems are being implemented
covering more emissions than South
Korea.
2 India 1,197 $48.5 Renewable energy and energy- eciency
trading programs were implemented.
3 Brazil 269 $5.4 An emissions-trading system in Sao Paolo
was implemented and a national system
is under consideration.
4 Vietnam 231 $6.4 A national emissions-trading system is
being implemented.
5 Mexico 171 $8.9 National climate law was passed with
potential or a national emissions-trading
system.
6 Malaysia 131 $1.4 A commitment to reduce emission
intensity by 40 percent by 2020 relative to
2005 was made.
7 Indonesia 124 $6.7 A commitment to reduce emissions 41
percent below business as usual by 2020
was made, and an emissions-trading
system is in development with the World
Bank.
8 Thailand 114 $2.0 An emissions-trading system is in
development with the World Bank.
9 South Korea 86 $1.9 A national emissions-trading system
capping 60 percent o emissions is being
implemented.
10 Chile 78 $3.1 A commitment to reduce emissions 20
percent relative to 2007 by 2020 was
made, and an emission-trading system is
in development with the World Bank.
Sources: UNEP Risoe Center, Vietnam Bridge, US Climate Action Network, Searle, Helmy7
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han any counry.11 Te Chinese governmen simulaneously leveraged he CDM
o bolser domesic regulaory capaciy by axing Chinese CDM projecs, raising
$1.5 billion by he end o 2011,12 and hen used he unds o plan and suppor
domesic climae policies. 13 Mos noably, he Chinese governmen developed a
series o sae-sponsored exchanges or CDM credis ha became a basis or learn-
ing abou emissions rading rom U.S. and European parners.
Te Chinese governmen, building on is oundaional experience wih he CDM,
launched a remarkable domesic emission-reducion eor. Te governmen is pilo-
ing seven new sae and municipal emissions-rading sysemsha will collecively
pu a ceiling on more greenhouse-gas emissions han Souh Korea produces and
will represen he second-larges such sysem in he world.14 Te naional carbon
exchanges creaed in hese counries o rade CDM credis will likely oversee pars
o hese new domesic emissions-rading sysems.15 China also announced plans
o use hese local rading sysems as a basis or a larger naional emissions-rading
sysem beginning in 2015.16 Te Chinese governmen also sared requiring domes-ic elecriciy companies o measure and repor heir greenhouse-gas emissions
o he governmen and will soon cap emissions rom nonresidenial buildings in
cerain ciies.17 Excied by hese new markes, many CDM projec developers and
nanciers plan o provide credis o hese new markes.18 A Finish company called
Greensream led he way earlier his monh by purchasing 1.2 million credis rom
he new Chinese markes and announcing plans o purchase 10 imes as many
credis in he nex year. China would no have launched hese policy eors as early
as i did wihou he successul clean-energy businesses, environmenal gains, ax
revenue, and new regulaory capaciy enabled by he CDM.
Experience wih inernaional carbon markes similarly enabled Souh Korea o
accelerae is domesic climae acion. Souh Korea has implemened more han 100
CDM projecs ranging rom solar-elecriciy generaion o landll gas desrucion.
Tese projecs helped Souh Korean indusries, mos noably he large iron and
seel secor, o learn how o improve heir eciency and inves in emission reduc-
ions in oher counries.19 Te Souh Korean governmen has also used he CDM o
improve heir governance capaciies, including expanding he roles o muliple agen-
ciesmos noably he Minisry o Commerce, Indusry, and Energy, he Korean
Emission Reducion Regisry Cener, he Korean Energy Managemen Corporaion,and he Korean Foundaion or Qualiyand creaing wo new unds o inves in
CDM projecs and oher emission-reducion opporuniies.20
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Srenghened by is CDM experience, Souh Korea has underaken signican
new climae acion. I passed a law implemening a naionwide emission-rading
sysem saring in 2015.21 Te sysem will cap 60 percen o Souh Koreas emis-
sions and help enable he couny o mee he goal o reducing emissions by 30
percen relaive o business as usual by 2020 ha i commited o a he climae
alks in Copenhagen in 2009. Souh Korea will also promoe global climaeleadership by hosing he Green Climae Fundhe new nancial mechanism or
unding climae acion ha is being creaed by he inernaional communiyand
by promoing climae acion hrough he Global Green Growh Insiue, a new
inernaional insiuion dedicaed o helping naions enhance economic growh
hrough smar climae policies.
Oher major emerging economies wih CDM experience have also ollowed a
similar pah o urning inernaional carbon-marke paricipaion ino domesic
climae acion. Brazil, he counry wih he hird-mos CDM projecs22 a 269, is
now planning a naional emissions-rading program.23 Te sae o Rio de Janeiro,he source o 14 CDM projecs,24 has implemened a municipal emissions-rading
sysem.25 India, he counry wih he second mos CDM projecs26 a 1,197, has
esablished markes or renewable elecriciy and energy eciency.27 Mexico, he
fh-larges CDM projec sponsor28 wih 171, recenly passed a comprehensive
climae law ha ses a goal o reducing emissions by 30 percen by 2020 and
gives he Mexican governmen he auhoriy o implemen an emissions-rading
sysem. Smaller carbon-marke paricipans, including Belarus, Chile, Colombia,
Cosa Rica, Indonesia, and Jordan, have parnered wih he World Bank and he
European Union o begin developing heir own emissions-rading sysems.29
Over he pas decade global carbon markes have helped o ransorm he geopoli-
ics o climae change by changing he way developing naions hink abou climae
acion. Developing counries have long seen climae change as a problem caused
by developed counries and as such requiring a soluion by hese counries. Global
carbon markes, however, have changed he mindse o developing counry commu-
niies, businesses, and governmens by helping hem gain he capaciy o ake acion
agains heir own emissions and insilling an undersanding ha well-designed
climae policies can help atrac oreign invesmen, creae jobs, and simulae
economic growh. In oher words, he CDM demonsraed o developing naionsha climae acion could advance naional and local goals. In ac, he CDM on he
whole proved hugely popular wih developing counry governmens, enrepreneurs,
and communiies. Tis shif in hinking helped o produce numerous new policies
Over the past
decade globa
carbon marke
have helped t
transform the
geopolitics of
climate chang
by changing t
way developin
nations think
about climate
action.
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9 Center or American Progress | Carbon Maret Crossroads
and programs in developing counries as well as he new global poliical consensus
ha all naions need o ake naionally appropriae climae acion, raher han jus
developed naions. Conribuing o his new hinking represens perhaps he single-
larges accomplishmen o global carbon markes o dae.
Promoting sustainable development
Inernaional carbon markes have also spurred economic growh and povery alle-
viaion in developing naions. Carbon markes allow businesses o inves in people
who wan o gh climae change in he same way ha a sock marke allows indi-
viduals o inves in companies, and he nonpro Kiva.org enables individuals o give
microloans o enrepreneurs in developing counries, and he crowdunding pla-
orm Kicksarer permis people o suppor business endeavors around he world.
Over he pas decade hese invesmens encouraged oher invesmens, creaed
jobs, grew incomes, and suppored new enrepreneurship. Te sale o he 2.4 billionCDM credis issued hus ar, as described above, has generaed billions o dollars
in revenues or businesses in developing counries and $356 billion in supporing
invesmens.30 Tese invesmens have generaed even more in local economic aciv-
iy by providing jobs and wages ha bene local businesses.
Te Clean Developmen Mechanism, moreover, has helped o improve human
healh and well-being in developing counries by sponsoring benecial projecs.31
Many carbon-marke clean energy projecs increased access o elecriciy in rural
areas and, by displacing oher dirier sources o elecriciy, improved local air
qualiy.32 CDM-suppored projecs o capure wase gases rom landlls reduced
he risk o he polluans in hose gases leaching ino waer supplies. In a recen
survey o 202 random CDM projecs prepared or he Unied Naions, 66 percen
o hese projecs sough o improve local air qualiy, 52 percen ried o conserve
local naural resources, and 46 percen sough o improve wase managemen.33
Global carbon markes have also improved lives by diusing clean echnologies. A
quarer o all CDM projecs o dae have spread new echnologies and knowhow
o developing counries.34 An Irish company, or example, provided he echnol-
ogy o recover wase gases rom landlls, dairy arms, and catle ranches acrossBrazil and Mexico.35 Spanish and Danish companies provide many o he wind
urbines used o generae clean energy in China.36 Tis spread o echnology
can help lower he cos o reducing emission and encourage he developmen o
domesic indusries.
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Te inernaional communiy and developing counry governmens in paricu-
lar have in urn leveraged carbon markes o nance urher climae acion. Te
Unied Naions levied a 2 percen ax on all CDM credis and direced he revenue
ino an inernaionally managed und o help leas developed naions adap o cli-
mae change, collecing $324 million by early 2013.37 Te und suppored projecs
such as a $4.2 million eor o preven he desrucion o valuable agriculuralland in Argenina by helping local armers o beter manage heir waer and an
$8.6 million eor o help local communiies in Senegal adap o rising sea levels.38
Individual developing counries, mos noably China as described above, also
levied heir own carbon-marke axes. China used he revenues rom is ax o sup-
por many aciviies including a naional sudy on he impac o climae change on
China and how he counry can prepare.39
Cost savings in developed nations
Global carbon markes have made reducing emissions much more aordable or
developed naions, saving hem a leas $3.6 billion since 2008. Te cos o reduc-
ing emissions rom CDM was $1.30 o $6.50 less han alernaive emission reduc-
ion opporuniies in he EU Emissions rading Sysem, or EShe carbon
marke ha caps emissions or mos o Europerom 2008 o 2011.40 European
companies saved a leas $1.5 billion over he same period by purchasing hese
credis raher han reducing heir own emissions. Similarly, Japanese companies,
which also purchased CDM credis o ose heir emissions, saved a leas $2.1
billion. Furher, CDM credis reduced prices in markes such as he EU Emissions
rading Sysem by allowing developed-counry emiters o avoid making more
expensive emission reducions, saving companies and governmens even more
money hen ound by he above esimaes.
Creating political will for climate action in developed nations
Te cos savings rom inernaional carbon markes have enabled developed
counries o pursue ar more ambiious emission-reducion policies han would
have occurred oherwise. In general, carbon markes, by giving businesses cheaperopions or reducing heir emissions, make aggressive policies more poliically
palaable or businesses and he elecorae. Carbon markes also reduce he hrea
o wild price swings, a comor o risk-averse voers and businesses.
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Te 1997 Kyoo conerence oers concree proo o carbon markes impac on
ambiion. In exchange or including he Clean Developmen Mechanism in he
Kyoo Proocol, mos developed naions agreed o more ambiious emission-reduc-
ion arges. Japan, or example, saed publicly ha he CDM allowed i o commi
o sronger emission-reducion goals. Te lead U.S. climae negoiaor a he ime
Su Eizensa esied o Congress ha he Unied Saes would no have agreed oany emission reducions a Kyoo wihou he CDM.41 In 2009 he European Union
oered o increase is Kyoo emission-reducion arge rom 20 percen o 30 per-
cen in exchange or oher naions aking on ambiious arges and said ha i would
achieve mos o he addiional miigaion hrough global carbon markes.42
Many privae companies, including Dell, Google, HSBC, and PepsiCo, and a num-
ber o universiies and oher insiuions also made volunary pledges o reduce
heir emissions ha depended heavily on inernaional carbon markes.43 Google
alone purchased $15 million worh o carbon oses, enough o help make he
company carbon neural.44 Tough small compared o governmen commimens,hese privae-secor acions have he poenial o help shif business perspecives
on climae acion, eiher because hey discover business opporuniies or because
hey learn ha miigaion coss are manageable.
Carbon-market shortcomings
Despie many imporan accomplishmens, inernaional carbon markes have
also ailed in a number o signican and highly visible ways. On several occa-
sions marke regulaors have given credis or quesionable emission reducions,
ceriying a number o projecs as environmenally benecial when hey migh
have occurred wihou he carbon-marke suppor. Te regulaors also creaed a
slow and opaque approval processes ha has been arnished by apparen conics
o ineres. Tese ailures, described in more deail below, have undersandably
eroded public condence in inernaional carbon markes.
Environmental impact
Early inernaional carbon markes may have given credis or quesionable emis-
sion reducions, mos noably or desroying sockpiles o cerain climae damag-
ing air condiioning coolans known as HFC-23.45 Te CDM gave a large number
o credis47 percen o credis issued o dae46or hese projecs because o
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he gass ousized impac on global warming and because he desrucion o he
gas could clearly be shown o resul rom carbon markesdesroying he gas
produced no oher revenue. Knowing his, a number o coolan-producion plans
may have increased producion o he gas only o receive paymens rom carbon
markes or desroying he unnecessary sockpiles ha hey produced. I remains
unclear how many o he issued credis were arnished by his marke manipula-ion, and boh he CDM regulaors and CDM-credi buyers in Europe have aken
seps o end his abusive pracice. Regardless, he aair remains a serious black eye
or global carbon markes.
Global carbon markes also may have creaed oher quesionable carbon
securiies relaing o hydro, wind, and oher renewable-elecriciy projecs.
Renewable-energy projecs have produced 17 percen o CDM credis so ar
and are orecased o increase heir share o 45 percen by 2020.47 Many o hese
renewable-energy projecs derived only a small porion o heir revenue rom
CDM credis, relied on widely available echnologies, and received signicanaddiional governmenal suppor hrough ax credis and subsidies. Tese acors
may indicae ha some o hese projecs were buil wihou he suppor o he
CDM. Wheher ha is knowable or even maters is debaable, and expers remain
divided abou wheher hese projecs should have been approved.
Governance
When he Clean Developmen Mechanism began, global carbon rading was brand
new. Wihou pas experience and applicable models or success a he global level,
he CDM suered rom a long lis o regulaory ailures in is early years. Iniially,
is regulaors were hopelessly slow, inecien, opaque, and seemingly poliically
biased. Te governing body o he CDM involved isel in almos all decisions, slow-
ing he average ime required or projec approvals o 800 days a heir wors in lae
2008mos decidedly no moving a he speed o business.48 Te dicul process
and long delays signicanly increased he cos o regisering early projecs wih
he CDM, helping o creae ransacion coss o $0.06 o $0.47 per on o emission
reducions or a number o early projecs in India.49 Te ransacion coss posed
larger barriers or leas developed counries, which lacked he capaciy o navigaehe complex bureaucracy o he CDM and had ewer opporuniies o reduce emis-
sions.50 Members o he CDM governing body, moreover, simulaneously served as
climae-reay negoiaors or heir counries and represenaives o heir counrys
Renewable-
energy projec
have produce
17 percent of
CDM credits
so far and are
forecasted to
increase their
share to 45
percent by 20
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CDM regulaor, creaing a high poenial or conics o ineres.51 Te CDM gov-
erning body also ailed o ollow consisen writen guidelines, ofen making ad hoc
decisions and breeding uncerainy among invesors.52 On op o all o his, many
meeings o he CDM leadership occurred behind closed doors, and no appeals
mechanism exised o challenge board decisions.
Sustainable development
Some global carbon-marke projecs also may have harmed he local environ-
men and communiies. Criics allege, among many hings, ha he CDM has
encouraged he consrucion o large hydroelecric power plans ha harmed local
ecosysems, displaced communiies, and damaged local waer qualiy.53 Oher
sakeholders argue ha CDM projecs o collec landll mehane have desroyed
he livelihoods o communiies o garbage pickers who depend on local dumps.
Mos horribly, owners o a CDM accredied palm-oil planaion in Hondurasallegedly massacred 23 armers in a land dispue.54 Tese ailures, wheher he
CDM could have prevened hem or no, y in he ace o one o he win objec-
ives o he CDM o promoe susainable developmen.
Effect of criticisms
Tese criicisms have harmed he credibiliy o inernaional carbon markes and
deerred naions rom conribuing o heir growh. Parly in response o hese
criicisms, some counries have placed limis on he ype and number o inerna-
ional carbon-marke credis ha hey will allow ino heir domesic markes. As
o 2013 he European Union no longer acceps credis rom projecs o eliminae
cerain gases wih large global warming impacs such as HFC-23 and N2O and
rom projecs in middle-income counries including China ha were regisered
wih he CDM afer 2012.55 Caliornia, as described above, did no allow CDM
credis and does no plan o allow any inernaional credis or he rs ew years
o is program.56 Likewise, Souh Korea disallowed any inernaional oses or
he rs ve years o is new emissions-rading sysem and will only allow inerna-
ional oses o mee 10 percen o demand during he nex ve years.57
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Resolving the legacy
Te ailures o global carbon markes, hough serious a rs, are easy o oversae.
Tese shorcomings should no obscure he ar more imporan benes o carbon
markes or he climae.
Positive environmental impacts
While being oo lenien in one respec by issuing more credis han environmen-
ally jusied, global carbon markes were also oo sringen in oher ways. Many
projecs caused more emission reducions han raders were allowed o sell and
his buer makes up in par or some o he more quesionable projecs. Aware o
he risks posed by seting up he rs major carbon-marke issuer, he CDM regula-
ors consciously used conservaive assumpions in calculaing how many credis o
give each projec. Te rules on mehane-aring projecs, or example, require lowesimaes or how much mehane he projecs desroy. In response o criicisms,
in anoher example, he CDM lowered he limi on he number o credis ha he
much maligned coolan projecs could receive. Moreover, he CDM generally only
gave credis o any given projec or a period o seven years. Tese projecs, however,
creaed power plans and mehane-capure sysems ha could coninue o operae
proably and reduce emissions or many years ino he uure.
Independen analysis suggess ha he ailures by he CDM o police agains ake
credis and he conservaive rules o he CDM may have had similar environ-
menal impacs, eecively oseting each oher. ogeher, all he environmen-
al ailures cied by criics would invalidae abou 62 percen o exising CDM
credis.58 Te combined eec o all he conservaive decisions and sandards
made by CDM would have caused he CDM o supply 55 percen oo ew credis.
Admitedly, knowing he acual environmenal impac o he CDM is impossible,
bu he prevailing narraive ha CDM caused signican environmenal harm is
mos likely wrong.
Governance reforms
Te regulaors o inernaional carbon markes have also already come a long way
in improving heir perormance. Te CDM regulaors responded o criicisms by
sreamlining projec approvals, improving inernal and exernal communicaion,
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consolidaing and ormalizing rules, and sandardizing projec approval pro-
cesses.59 Reecing on some o hese posiive changes, he lengh o ime needed
o review a ypical projec ell o 200 days in lae 201160a 75 percen reduc-
ion. Sakeholders now widely acknowledge ha he managemen o he CDM is
improved.61 More reorms are needed, bu i is only air o acknowledge ha he
CDM is no longer he adminisraive nighmare i once was.
TABLE 3
Challenges faced by important markets
Market
Crises and
governance failures Reforms Current status and value
Stock markets Major bubbles and
crashes
Extensive national
and international
regulations
$55 trillion in global capital
that orms the backbone o the
global economy
Agricultural
utures
Destructive price
manipulation
Disclosure requirements
and trading limits
Key nancing tool o armers
traded on multiple exchangesacross the world
Home
mortgages
Excess lending and
oreclosures
Lending standards $9.5 tril lion in U.S. capital that
enables millions o borrowers
to own homes
SO2 trading
program
Excess prots or
polluters
Tightening standards
to urther reduce
emissions
Caused dramatic reductions in
acid rain at low costs
Sources: Bloomberg,62 Freddie Mac63
Carbon market failures in context
Te successes and ailures o inernaional carbon markes mirrored hose o many
emerging markes beore hem. All markes, especially nancial markes, ace
crises and governance ailures as hey adap o innovaion and changed poliical
circumsances. Regulaors coninuously respond wih reorms o address he bur-
geoning challenges. Despie his back and orh, securiies markes play vial roles
in supporing he global economy and meeing peoples needs. able 3 provides a
number o examples o nancial markes ha have experienced major urmoil bu
noneheless are widely acceped as being benecial.
Sock markes provide a prime example o he challenging bu essenial role o
markes. Sock markes have experienced bubbles and crashes as exuberan inves-
ors run up prices and ee bad invesmens. Regulaors have responded o such
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volailiy by requiring raders o disclose more inormaion and resricing he size
o heir bes. In he meanime, sock markes became he $55 rillion backbone
o he global economy, helping new companies raise money and invesors gain
wealh. Te same is rue o markes or agriculural uures ha allow armers and
ood processors o insure hemselves agains swings in ood prices. Similarly, SO2
emissions credispermis ha limi emissions o he polluans rom coal-redpower plans ha cause acid rainhave proven heir worh.
Te CDM was creaed as a learning-by-doing mechanism. Counries hoped he
CDM would help hem harness he creaiviy and energy o he privae secor o
reduce emissions a low coss and in ways ha promoed susainable developmen.
Privae invesors and heir local governmen parners were given wide laiude o
experimen wih a broad range o projecs and secors. Unsurprisingly, his experi-
men, like mos experimens, produced successes and ailures. Te imporan
hing o bear in mind is ha he CDM buil a oundaion o valuable knowledge
and capaciy upon which he world can build a new wave o carbon markes haproduce many more successes han ailures. Te CDM has come a long way in is
less-han-10-year hisory, probably ar urher han many oher nancial markes
have over a similar period o ime. Wih any luck, he CDM will some day be seen
as he prooype ha enabled uure success a a ar larger scale.
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Current state of carbon markets
Market threats
Market proliferation
Inernaional carbon markes hrough heir successes and ailures alike have
already helped o pave he way or a second generaion o carbon markes. Japanhas announced plans or is Bilaeral Ose Credi Mechanism, or BOCM, which
will help Japan mee is ousanding climae commimens and creae expor
markes or Japanese companies.64 In 2012 Caliornia launched is own marke o
provide oses or is new saewide emissions-rading sysem. Meanwhile, China
recenly laid down guidelines or a carbon marke o suppor is new municipal
and provincial emissions-rading sysems.65 Tese new markes reec in par
he ailure o he original carbon markes because counries developed heir own
insiuions insead o rusing he Clean Developmen Mechanism. Tey also
demonsrae he success o exising markes, which blazed he poliical rail and
underook he inellecual heavy lifing ha made hese new markes possible.
Te prolieraion o new markes presens a number o challenges. Each o hese
markes will likely develop unique sysems and rules, racuring he global sysem
and making i harder or businesses o rus he plehora o credis and operae
under he regulaory pachwork governing hese various markes. Moreover, he
new markes could creae compeiion ha would cause he lowering o envi-
ronmenal sandards in an eor o atrac new projecsa race o he botom.
Te compeing counries migh urher respond by obscuring he environmenal
weakness o heir individual mechanisms, reducing ransparency and causing evenmore harm o he credibiliy o he global carbon-marke sysem.
Properly managed, however, he prolieraion o carbon markes could be an
incredible opporuniy. Te individual markes could beter mee he individual
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poliical and economic needs o heir hos counries. Tey could also ake some
pressure o he srained CDM. Moreover, he compeiion beween markes
could moivae new innovaion and lead o more cos-eecive and environmen-
ally benecial markes. Encouraging his consrucive prolieraion, however,
would require careul guidance by he inernaional communiy.
Price collapse
Despie heir success in driving climae acion and acceleraing economic growh,
he original inernaional carbon markes now ace a price collapse ha hreaens
heir viabiliy. CDM credi prices have declined seeply in recen years, alling
rom $20 a he end o 2008 o less han $5 a he end o 2012 and down o 44
cens oday, as shown in Figure 2.66 Te declining prices likely resul rom a pro-
jeced sagnaion in demand and an explosion o
supply. Annual demand or inernaional carbonmarke credis, which sood a 319 million
credis in 2011,67 could rise o 330 million by
2015, 520 million by 2020, and decline o 500
million hereafer.68 Annual supply, meanwhile,
which sood a 308 million credis in 2011,69
could explode o 1.1 billion by 2015, 2.1 bil-
lion by 2020, and 2.3 billion hereafer.70 Te
low prices undermine incenives o inves in
uure emission-reducion projecs, limiing he
benecial reach o carbon markes. Over ime
he price collapse will urher damage he image
o carbon markes and lead more counries and
businesses o orgo allowing or purchasing he
credis, urher weakening demand.
Counries caused his dearh o uure demand
by ailing o pursue sucien emission reduc-
ions and o make use o he exising global
carbon markes. Only Europe and Japan purchase signican quaniies o iner-naional credis,72 and Japan may swich o purchasing credis hrough is own car-
bon marke in he no oo disan uure.73 Mos o he governmen planning or
new signican emission reducions hrough markesChina, Souh Korea, and
he sae o Caliorniado no plan o allow many, i any, inernaional credis.
FigurE 2
Historical CDM credit prices
0
5
10
15
20
25
Aug. 11
2008
Aug. 11
2009
Aug. 11
2010
Aug. 11
2011
Aug. 11
2012
Source: Thompson Reuters Point Carbon71
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Wihou a signican shif by counries, global
carbon markes will ace depressed prices or
many years, hreaening heir viabiliy.
Tarnished reputation
Exising carbon markes also ace a serious
credibiliy challenge. Te highly visible environ-
menal, regulaory, and susainable developmen
ailures described earlier have arnished he repu-
aion o he CDM. Counries ace pressure rom
environmenal advocaes o rejec he CDM and
carbon markes in general in avor o more expen-
sive emission reducions a home. Tis pressure
conribued o he decisions by counries o scaleback or disallow he use o CDM credis in heir
markes. In response, he CDM has underaken
signican reorms as previously described, bu
hese have so ar ailed o sucienly improve is poor repuaion.
Policy responses
European efforts
Europe, he larges source o demand or inernaional carbon markes, aces a
similar crisis. Te EU Emissions rading Sysem credi prices peaked in 2008 a
around $43 and seadily declined o abou $10 by he end o 2011, now sanding
a approximaely $4.75 Te low prices resul rom a number o acors including he
global recession in 2008 and he coninuing European nancial crisis ha lowered
economic oupu and also emissions.76 Te low prices also resul rom ambiious
European policies such as incenives or renewable-elecriciy generaion and
energy-eciency sandards or buildings and auomobiles, which urher reducedemissions. Te lower-han-expeced emissions make complying wih he EU carbon
arges easier or companies and hereby lowers EU and global carbon-credi prices.
FigurE 3
Future trends in international carbon marketdemand and supply
0
0.5
1
1.5
2
2.5
2013 2015 2017 2019 2021 2023
Supply
Deman
Source: Michaelowa 201274
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Te European Commission pu orward a proposal ha would have back-loaded
or delayed he aucion o a large number o credis900 million credis rom
2013 o 2015 or 15 percen o he credis i plans o issue over hose years77unil
afer 2015.78 Tis would have increased credi prices and encouraged Europeans
o buy more inernaional oses. In April 2013 he European Parliamen, how-
ever, rejeced he proposal by a narrow margin.79
Te parliamens voe does nosignal he end o he reorms as he European Commission could marshal suppor
and pu orward a new version o he proposal in he monhs ahead. Te ailure,
however, symbolizes Europes curren inabiliy o moun he domesic leadership
needed o press or sronger inernaional acion.
New global mechanisms
Counries also ace crucial decisions on wo new carbon-marke eniies. In 2011
naions agreed in global climae alks o creae wo new marke mechanisms. Ters, deemed he New Marke Mechanism, would be a carbon markesimilar
o he CDM in his respec onlyha could ceriy emission-reducion credis
rom developing naions or use by oher counries. Te New Marke Mechanism
would likely include a secoral-crediing sysem, seting baselines or naional eco-
nomic secors such as elecriciy generaion, cemen manuacuring, or oresry,
and providing credis i he counry beas he baseline. Tis would mos impor-
anly enable counries o receive credis or heir climae policies. Te second
poenial marke eniy, wih he somewha odd name o Framework or Various
Approaches, would speciy minimum sandards or local, naional, and regional
carbon markes and oher climae policies, as well as enable counries o compare
he impac o dieren policies, among oher hings.
Boh mechanisms, however, remain largely undened. Naions in 2011 did no
speciy many deails abou eiher mechanism. In 2012 counries agreed o dene he
srucure and rules or he New Marke Mechanism during 2013. Lacking clariy on
he inen o he Framework or Various Approaches, naions also decided o creae a
similar one-year process o dene a purpose and scope or ha policy vehicle.80
Tese new carbon markes represen imporan opporuniies o encourageemission reducions around he world. Te secoral crediing o he New Marke
Mechanism could increase he scale o emission reducions dramaically and
enable developing counries o become amiliar wih how o implemen compre-
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hensive naional climae policies. Te Framework or Various Approaches could
raise sandards or carbon markes while allowing counries o pursue he bes
policy pahs o reduce heir emissions.
Clean Development Mechanism reforms
Counries are also considering a number o reorms o address many o he
governance ailures regarding inernaional carbon markes. Te Unied Naions
brough ogeher a high-level panel in early 2012 o review he successes and
ailures o he CDM and propose new reorms. Te panel pu orward a number o
proposals ha would address many o he remaining governance challenges ha
sill plague he CDM. 81
Te panel called or changes in he role and srucure o he CDM regulaors o
improve heir perormance. Te suggesions included encouraging he governingbody o he CDM o spend less ime dealing wih echnical issues and more ime
addressing higher-level sraegic quesions. Te panel encouraged he governing
body o delegae he echnical responsibiliies o is sa and develop perormance
merics o evaluae is sa. Te panel also proposed changes o he makeup o he
CDM leadership, including requiring members o be chosen based on echnical
knowledge raher han regional aliaion.
Te panel also suppored a plan o develop an appeals mechanism o handle
complains agains he CDM regulaors. Under he curren sysem sakeholders
have no recourse oher han asking counries o raise he issues a he annual cli-
mae alks. Te panel proposed creaing an appeals mechanism wih he power o
overrule procedural decisions made by he CDM regulaors. Separaely, he panel
proposed a grievance mechanism or local sakeholders o address local environ-
menal and social concerns wih specic CDM projecs.
Te high-level panel urher oulined a number o proposals o improve he
environmenal impac o he CDM. Tis included suggesing ha he CDM
sandardize he way i measures and evaluaes emission reducions and use even
more conservaive assumpions o reduce he number o credis given o ques-ionable projecs. Te panel recommended creaing wha hey ermed posiive
liss whereby projecs meeing cerain high sandards would receive auomaic
approval. Tis would encourage more projecs wih sronger environmenal
inegriy. Te panel urher recommended creaing incenives o encourage new
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projecs o ake advanage o new echnologies, o accelerae echnological devel-
opmen and emission reducions.
Te panel oulined many oher reorms o enhance he economic benes o
projecs or local communiies: increase he posiive indirec impacs or he
local environmen; encourage more projecs rom underrepresened regions; andsreamline he approval process. Te governing body o he CDM is now review-
ing he panels recommendaions and deciding which ones o implemen. Tese
reorms, hough no a cure o all problems, would go a long way oward addressing
he wors criicisms o exising carbon markes.
Te U.N. panel is no he only source o poenial reorm or he CDM. Te
Unied Naions has requenly asked CDM marke paricipans o propose
reorms. A recen soliciaion atraced 171 repors suggesing various improve-
mens o he CDM.82 Te remendous response indicaes no only he possibiliy
or reorm bu also he coninuing ineres in seeing he CDM improve.
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The way forward
Curren naional acions o comba climae change all well shor o wha is
needed o preven unaccepable risks o caasrophic climae change. Scieniss
agree ha he world is producing ar oo much climae polluion o keep global
emperaure increases a 2 degrees Celsius over preindusrial levels by 2100he
generally acceped upper hreshold or wha scieniss consider sae.83 In ac, hey
hink he world is on rack or 4 degrees o warming.Tis horrible scenario would
cause more requen and severe hea waves, render much cropland unusable
wih esimaes as high as 35 percen in Arica, and reverse decades o economicdevelopmen in he worlds poores counries.84 Te developed world would no
be spared, wih he Unied Saes acing more exreme sorms, more droughs
decimaing is agriculure, and higher risks o diseases.85 Such shifs would be
beyond he abiliy o human socieies o simply adap and could conribue o
mass migraions and geopoliical insabiliy.
Inernaional carbon markes have provided a rare brigh spo by conribuing o a
sronger global culure in suppor o climae acion. Te original markes, however,
now ace crises ha hreaen heir uure viabiliy. Counries, businesses, and con-
sumers could use carbon markes o cos-eecively ake aggressive acion and help
preven caasrophic climae change. New poliical will and commimen o harness
he power o hese markes is essenial. Tis new invesmen in urn would reinorce
exising carbon markes and creae a solid oundaion or heir coninued success.
Increase ambition
Leader-level summit
Te world needs o convene an emergency summi on climae acion o help accel-
erae measures o aver massive climae change. We canno aord o wai unil
2015he earlies ime when global climae negoiaions migh involve world
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leadersnor is he Unied Naions negoiaing orum necessarily he bes vehicle
or agreeing on concree climae acions and invesmens raher han reay commi-
mens. A lae 2013 summi o world leaders could be buil around he urgen need
o ramp up acions, highlighing climae inervenions such as carbon markes ha
also srenghen economic growh and reduce economic and environmenal vulner-
abiliy. Te summi would creae a plaorm or naions and inernaional insiuionso expand exising collaboraion and explore new parnerships, promoe bes-pracice
climae policies, and announce new domesic and mulilaeral climae commimens.
Such summis enable leaders o look beyond shor-erm necessiies and reach agree-
mens ha proec uure generaions. Te las ime counries convened such a leader-
level summi was a Copenhagen in 2009. Ta meeing, or all o is aws, orced
world leaders o conron climae change and elicied signican new commimens
o reduce climae polluion. Te summi proposed here could go much urher han
Copenhagen as i would no be consrained by he exising climae agreemens and
reay negoiaions and, as he name suggess, would ocus on angible acions. TeWorld Bank under is curren presiden Jim Yong Kim and his new public commi-
men o climae acionas well as he banks saus as a leading global orum ocused
on economic developmenwould be well posiioned o convene such a summi. In
his eor he World Bank could parner wih he Inernaional Moneary Fund, or
IMF, and is curren chie Chrisine Lagarde, a reliable climae champion, and U.N.
Secreary General Ban Ki-moon, who has campaigned irelessly or climae acion.
Agreemens reached a his summi could eed ino he major ocial climae negoia-
ions planned or 2015, helping o pave he way or a uure climae reay.
Te summi could include an imporan role or privae-secor leaders and pursue
launching public-privae parnerships as one o is key goals. A he conerence
global business leaders could emphasize he imporance o predicable and srong
public policies and make commimens o new climae-riendly invesmens sub-
jec o enacmen o such policies. World leaders could respond o hese privae-
secor calls or acion and commimens hrough policies ha suppor businesses
including invesmens in carbon markes.
Invest in carbon markets
Counries should deliver on new pledges o ramp up climae acion agreed o in he
proposed summi signicanly by increasing demand or inernaional carbon cred-
is. Tere are several reasonable ways o do his. Naions could creae a new global
A late 2013
summit of woleaders could
built around th
urgent need to
ramp up actio
highlighting
climate
interventions
such as carbon
markets that
also strengthe
economic gro
and reduce
economic and
environmenta
vulnerability.
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carbon bank o nance emission reducions in developing naions. Te bank could
have a global saus analogous o he IMF and he World Bank and be housed in or
have branch oces in Beijing or Washingon, D.C.86 Anoher opion would be or
exising inernaional insiuions, perhaps primarily he World Bank, o esablish a
bridge und ha would buy CDM and oher global carbon-marke credis o resore
he balance o carbon marke supply and demand unil carbon prices in Europe,Caliornia, Ausralia, and elsewhere rise again as hey are expeced o do over ime. A
hird opion would be or he inernaional communiy o direc he Green Climae
Fundhe new climae-nance vehicle arising ou o global climae alkso pur-
chase global carbon-marke credis, among oher asks.
A nal opion would be or major economies o agree, perhaps in he G20 or G8,
o arges or nancing emission reducions in developing naions, leaving each
naion o decide how bes o implemen is commimenha is, a collecive
pledge o purchase a minimum number o emission reducions hrough global car-
bon markes. o ulll heir share o such a pledge, he EU naions migh chooseo use heir emission-rading sysem. While no a G-20 member, Norway migh
use public unds hrough governmen-o-governmen cash-on-delivery bilaeral
deals o do is share, as i has done in he pas. Te Unied Saes migh rely on
carbon-marke purchases rom Caliornia supplemened by new resources rom
Washingon, D.C., whenever easible. Many counries would look o inernaional
carbon markes, wih heir ease o access, o mee heir goals. In addiion o ex-
ibiliy, he opion o a collecive global goal or carbon-marke suppor obviaes
he need or governmens o hand over new unding o a mulilaeral insiuion.
TABLE 4
Options for investing in global carbon markets
Proposal Description
1 New carbon market bank New multilateral institution to nance emission reductions in
developing countries through carbon markets
2 New carbon market und New und within the World Bank or other existing institution to
support international carbon markets
3 Scaled-up Green Climate Fund Support and direct the Green Climate Fund to strengthen
international carbon markets.
4 International emission-reductionnancing targets
New commitments by countries to nance emission reductionsin developing countries through international carbon markets
and other means.
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Each o hese ideas could work and deserves serious consideraion. Tey each have as
heir goal a public-privae parnership in which he governmen aciliaes expanded
demand or carbon markes and he privae secor nds ways o lower coss and
explores innovaive ways o gh climae change. Te imporan hing is ha naions
pick an approach and implemen i aggressively. Te bigges obsacle o any o hese
ideas, o course, is he poliical will needed o raise he necessary resources o increasedemand or inernaional carbon-marke credis. Counries could bes overcome
his barrier by agreeing o one or more o hese approaches in he ype o leader-level
summi described above. Only such a global resoluion, aken among all he major
emiters, could creae he necessary leadership and resolve required.
Responsible energy
Te world coninues is decades-long rend o producing more ossil uels. Global
oil producion rose 12 percen rom 2003 o 2012, and naural gas producionrose 26 percen.87 Producion in he Unied Saes rose even more over he same
period27 percen or oil and 26 percen or gaspushing he counry slowly
oward becoming an oil and gas exporer.88 Tis new producion added o he oil
and gas indusrys ousized pros wih ExxonMobil making $44.9 billion in 2012,
jus shor o is all-ime record se in 2008 beore he global recession.89 Despie
heir success, ossil-uel companies coninue o receive signican subsidies rom
cash-srapped governmens. In ac, a a ime when many counries ace high
unemploymen and major budge decis, governmens are direcly subsidizing
ossil-uel producion and consumpion o he une o $480 billion a year.90 aking
ino accoun he harm o hese ossil uels o sociey hrough global warming, he
world provides a $2 rillion subsidy or ossil uels, wih he Unied Saes leading
all oher counries a $502 billion.
Much o he new oil and gas producion, having exhaused he easily accessible
supplies, carries wih i he hrea o poenially large environmenal harm beyond
climae change. Hydraulic racuring, or example, can hreaen local waer sup-
plies, and ar sands require he desrucion o millions o acres o oress. Oher
producion is occurring in high-risk areas ha are dicul or emergency respond-
ers o reach in case o spills or oher disaser, such as he deep waers o he Gul oMexico, as demonsraed by he Deepwaer Horizon oil spill in 2010. Te same is
rue o he ragile and remoe Arcic Ocean ha is experiencing a boom in oil and
gas drilling and exploraion.
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Fossil uels will remain a realiy in he near erm as he world canno ransiion
overnigh o renewable energy and elecric cars. Leaders o he worlds major
economies, however, should accelerae heir eors o phase ou ossil uels and
use carbon markes o help ensure ha he necessary ossil uels are responsibly
developed. World leaders should sar by making good on heir commimen a
he G-20 meeing in Pitsburgh in 2009 o end harmul ossil-uel subsidies andshould redirec a porion o hose revenues o urher reduce emissions hrough
global carbon markes. In addiion, when ossil-uel producion has overly large
environmenal impacs or occurs in high-risk areas, counries should work wih
companies o encourage hem o dedicae a porion o heir revenue o miigaing
he environmenal damage. Tis could include having companies purchase credis
rom inernaional carbon-marke projecs ha boh reduce emissions and add
o he local environmen, hereby oseting some o boh he climae and noncli-
mae harm o ossil uels. As ossil-uel producion exends o new unapped lands
and seas, governmens should help oil companies o se aside even more revenue
o eliminae he urher climae polluion ha heir new producion will cause.Fossil-uel companies already allocae money o proec agains oil spills and
reclaim mined-ou lands; i only makes sense or hem o use carbon markes o
miigae he ar larger risks rom climae change.
TABLE 5
Options for responsible energy policy
Proposal Description
1 Scale back and redirect ossil-uel
subsidies
Follow through on G20 commitment to end harmul
ossil-uel subsidies and then redirect portions orevenues to urther protect the climate through
international carbon markets
2 Insure against high-risk ossil-uel
development
Work with ossil-uel developers in high-risk areas to
invest in international carbon markets
3 Responsibly develop new ossil uels Have new ossil-uel production ofset a portion o its
climate impact by investing in emissions reductions
through international carbon markets
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Bringing any o hese proposals ino being would require careul policy design and
srong poliical leadership o assuage economic and compeiiveness concerns.
Inernaional leaders acing in concer would provide he bes chance o meeing
hese challenges and avoiding new regulaions ha orce ossil-uel developers o
migrae overseas. Inernaional lending and developmen bodies such as he World
Bank and he IMF could accelerae he process by implemening hese requiremensand aciliaing a poliical and echnical discussion o suiable policy opions.
Strengthen climate goals through markets
Simply pu, o sop caasrophic climae change, high-polluing naions, boh
developed and developing, need o urher reduce heir emissions. Inernaional
carbon markes can help enable such reducions. As was he case previously, a
ew key counries will need o provide he leadership o engender sronger global
climae commimens.
Europe needs o lead by seting an ambiious climae arge or 2030 and by
resuming is prior place as he worlds mos vocal developed counry climae
champion. o maximize is moral and poliical leadership on his issue, Europe
should se a arge in line wih he demands o science and hisorical responsibili-
ies. Tis likely will mean reducing EU emissions a leas 45 percen below 1990
levels by 2030. Te easies way or Europe o mee igher emission arges would
be o reduce he number o emissions permis i sells o European polluers in
Europes emissions-rading sysem hereby increasing demand and prices or iner-
naional carbon-marke credis. Wih he new geographic resricions imposed by
Europe ha exclude middle-income counries rom European carbon markes,
more demand or inernaional carbon credis would direcly suppor climae
acion and susainable developmen in leas developed counries. Te ailure o
he aoremenioned back-loading proposal evidences he challenges ahead or
renewed European leadership, bu European leaders mus overcome hese chal-
lenges. Te European Union should carry hrough his proposal and hen move on
o he bigger ask o increasing is climae ambiion by ighening is climae arge.
A number o major emerging economies, mos noably China, India, andIndonesia, also need o ranslae heir srong domesic policies ino global climae
leadership. weny years ago he world hough ha he way o solve he climae
problem was or developed counries o reduce heir emissions and or developing
counries o ollow wih developed-counry suppor. In he ensuing years many
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developed counries proved unable o overcome domesic poliical obsacles
and ailed o ake he necessary acion. Many as-growing developing counries
over he same period began o realize boh heir abiliy o reduce heir emissions
and he hrea posed by climae change o heir uure success. Tese emerging
economies now need o ransiion rom domesic emission reducions o global
climae leadership by adoping sronger climae goals, helping oher counries osep orward o conron climae change.
Open markets to international credits
Leaders should urher use heir exising emissions-rading sysems o creae
increased demand or emission reducions in developing naions. Emerging emis-
sions-rading sysems in Caliornia, Ausralia, Souh Korea, and China represen
major new ools o drive global climae acion. Many o hese sysems, however,
including he European carbon marke, have placed igh limis on credis rominernaional carbon markes. Te hisory o inernaional carbon markes over he
pas decade indicaes ha he benes o supporing inernaional acion as well
as domesic emission reducions. Balancing domesic and inernaional emission
reducions would help leverage sronger climae acion abroad and reduce coss
a home in he ways described previously. For hese reasons, he exising carbon
markes should allow more inernaional credis.
Tose who argue agains his usually claim ha inernaional sandards are no
high enough. Te soluion o his, however, is or purchasers o se even higher
sandards o weed ou quesionable projecs raher han o exclude whole groups
o inernaional sellers, as is currenly he case. Denying credis rom projecs in
emerging markes, or example, could cu o exremely poor regions o hose
counries and could preven carbon markes rom shifing he course o some o
he ases-growing sources o emissions in he world, such as he elecriciy secor
in China or he oresry secor in Indonesia. By opening up and holding markes
o high sandards, Caliornia, Japan, Souh Korea, and China could help raise he
qualiy o all carbon markes while also creaing a global culure o marke-based
climae acion. As described below, inernaional bodies, boh exising and new,
could urher help smooh his opening by encouraging global carbon markes osandardize heir procedures and elevae he qualiy o heir emission reducions.
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Empower consumers
Ouside o governmens, convincing consumers o ake acion hrough iner-
naional carbon markes could go a long way oward meeing he challenges o
climae change. Alhough governmen acion is vially imporan, i need no be
he only means o supporing global carbon markes, paricularly since he processo seting climae policy is moving slowly a he global level and in key counries
such as he Unied Saes. Many people around he world are deeply concerned
abou climae change. Te share o he populaion ha viewed climae change
as a personal hrea a he end o 2010, he las ime such a poll as aken, was 75
percen in Japan, 78 percen in Brazil, 53 percen in he Unied Saes, 60 percen
in Germany, and 21 percen in China.91 In he Unied Saes his number has since
seadily crep upward o 58 percen oday.92 Inernaional carbon markes have
creaed an easy means or individuals o nance emission reducions around he
world. Encouraging people o ake acion hrough inernaional carbon markes
could prove a game changer in he gh agains climae change.
Companies have ried o marke carbon credis o consumers in he pas wih limied
success. Airlines allow passengers o ose he emissions rom heir ighs, and many
websies sell carbon-marke credis, bu hese iniiaives have no gained a mass ol-
lowing. Recen rends in social media, mobile compuing, and online crowd-based
nance, however, may have creaed he ipping poin needed or consumer-nanced
carbon markes. Tese new echnologies and businesses now enable hundreds o
millions o people around he world, many o hem in he developing world, o sup-
por and inves in each ohers projecs and businesses on he Inerne.
Succeeding his ime will require ollowing he examples o recen high-prole
social business venures. One such venure called Produc Red, a collaboraion
beween major corporaions and he singer acivis Bono, raised $200 million or
HIV/AIDS programs in Arica and increased he prole o he issue by having
companies creae specially branded versions o heir producs and hen donaing a
porion o heir revenues.93 Te crowdunding websie Kicksarer has raised more
han $555 million or new business and personal venures by enabling compa-
nies and individuals o pich new produc ideas o millions o consumers.94 Te
company Mosaic has already developed a similar model or leveraging invesmensin roofop solar generaion or consumers.95 Tese and similar innovaions are
doing or chariable nance and socially responsible invesing wha Facebook and
witer have done or media over he pas 10 years. Social enrepreneurs, projec
The share of tpopulation th
viewed climat
change as a
personal threa
the end of 20
the last time s
a poll as taken
was 75 percen
in Japan, 78
percent in Bra
53 percent in
United States,
60 percent in
Germany, and
percent in Ch
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developers, and projec nanciers, wih he suppor o venure capial, should
explore how o apply such models o carbon markes.
Policy innovation
International carbon-market coordinating body
Te prolieraion o carbon markes brings major risks and opporuniies.
Compeiion, as described above, could lead o a race o he botom among
carbon markes or environmenal sandards and ransparency. Such declines in
qualiy could urher scare away poenial sources o demand or emission reduc-
ions rom he leas developed naions, such as he emerging emissions-rading
sysems in Caliornia, China, and Souh Korea. As is he case or global echni-
cal- and inormaion-sharing bodies or inernaional ransporaion saey, oodsaey, inellecual propery righs, and scienic, commercial, and manuacuring
sandards, a new global body could help guide he new carbon markes oward
producive compeiion and benecial innovaion.
Te world needs a global nancial body o help advise, enable, and where appro-
priae coordinae inernaional carbon markes. Tis body could play a number o
roles, including convening, helping naions o se echnical sandards, compiling
and sharing inormaion, and assising carbon markes in exploring he easibil-
iy o allowing exchanges o carbon credis across sysemsa process known as
linking ha would poenially creae a common global carbon currency. Tese
services would help improve he perormance and qualiy o inernaional and
naional carbon markes, while a he same ime encouraging he spread o such
markes o an ever-increasing number o counries and communiies.
Tis new body should be separae rom exising carbon-marke mechanisms bu
draw on heir capaciies and experise. Te exising carbon markes, mos noably
he Clean Developmen Mechanism, ace a coninuing credibiliy challenge ha
would undermine heir abiliy o exercise he leadership required o he new body.
Te Green Climae Fund, a new inernaional climae change body creaed lasyear, could poenially ll some o hese roles, bu i aces a number o poliical
challenges and will no be ready o ac or some ime. A a minimum, a ransi-
ional body is required ha could draw on he experience and sa capaciies o
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he CDM bu in a new conguraion. One opion would be o posiion he new
coordinaing body as a join projec o he IMF, he World Bank, and he Unied
Naions, poenially housed a he IMF given is superior experience wih iner-
naional nancial markes. Regardless o locaion, hese organizaions could help
provide he convening and poliical leadership o creae such a coordinaing body.
Governance reforms
Counries should encourage carbon-marke regulaors o make urher reorms
and help resore heir credibiliy. Exising carbon markes, especially he CDM,
coninue o ace image problems semming rom heir pas ailures and remain-
ing deciencies. Tese realiies and percepions undercu poliical suppor or
hese markes and poison he waer or he new carbon-marke sysems emerg-
ing around he world. Expers including he panel brough ogeher in 2012 by
he Unied Naions o assess he CDM have proposed a number o consrucivereorms ha would go a long way oward resoring marke credibiliy and avoid-
ing uure problems. Tese necessary reorms call or more ransparency, beter-
dened roles or carbon-marke regulaors, appeals mechanisms and due process
a more sreamlined process or approving projecsand saeguards o ensure
he inegriy o emission reducions and susainable developmen oucomes.
Counries should adop hese reorms o ensure and srenghen he CDM and
clear a pah or new carbon markes.
Learning-by-doing
Counries should urher push exising and new carbon markes o encourage
innovaion and pracical experiences ha migh bes be described as learning-
by-doing. Global carbon markes have helped blaze he rail or many o he
mos imporan climae policies. Tey can coninue o play his caalyic role in a
number o areas including new secoral-crediing markes. Allowing counries o
buy and sell new carbon securiies represening emission reducions across enire
economic secors, as described above, has he poenial o increase climae acion
sharply in boh developed and developing naions alike, jus as more limied CDMprojecs have done. Secoral ransacions are likely o involve emission reduc-
ions and nancial ows many orders o magniude larger han CDM projecs.
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Successully esablishing such sysems would require keeping he privae secor,
wih is energy and creaiviy, a he cener. Secoral regimes should seek o creae
nancial incenives or he privae secor o coninue o erre ou he lowes-cos
and larges emission reducions.
Carbon markes could play a paricularly posiive role in helping o reduce emis-sions rom he ores secor. Despie he ac ha deoresaion generaes around
15 percen o global greenhouse-gas emissions,96 he Kyoo Proocol largely
excluded he ores secor rom he CDM and hereby rom Europes emissions-
rading programs. Tis has undermined acion by many oresed counries, such
as Brazil, Indonesia, and he Democraic Republic o he Congo, and lef hose
counries and he secor underserved, despie heir many low-cos emission
reducions.97 Reducing emissions rom he oresry secor would bring wih i a
variey o benes including improved legal proecions or small landholders and
indigenous communiies, beter waer qualiy or downsream communiies and
arms, and proecions or biodiversiy and endangered species. Exising and newcarbon markes should accelerae acion in his imporan secor by expanding
heir eors o credi emission reducions rom oress.
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Conclusion
Global carbon markes coninue o suer under he weigh o a widely held repu-
aion o environmenal ailure and regulaory mismanagemen. Tis percepion
masks a ar more imporan legacy o acceleraing climae acion and supporing
susainable developmen by changing he way people all around he world hink
abou he poenial o climae policy o bene heir lives. Whereas a decade ago
climae acion was somehing mos people in he world el ha ohers, speci-
cally developed naions, should underake, global carbon markes have conribued
o he new global consensus ha well-designed climae policies can urher localand naional prioriies including economic growh and susainable developmen.
Inernaional carbon markes, like he sock markes and morgage securiies beore
hem, cerainly require beter oversigh bu hey are also invaluable ools or incen-
ivizing climae acion in ways ha bene people around he world. Naions need o
work harder o reorm exising markes and creae new ones, and i hey do, carbon
markes can help he world rise o he pressing challenge o climae change.
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About the authors
Nigel Purvis is he ounder, presiden, and chie execuive ocer o Climae
Advisers, a Washingon, D.C.-based consulancy specializing in U.S. climae
change policy, inernaional climae change cooperaion, global carbon markes,
and climae-relaed ores conservaion. Previously, Purvis direced U.S. environ-menal diplomacy, mos recenly as depuy assisan secreary o sae or oceans,
environmen, and science. In ha capaciy he oversaw U.S. oreign policy rela-
ing o climae change, biodiversiy conservaion, oress, oxic subsances, ozone
depleion, and environmenal aspecs o inernaional rade, as well as serving
as he depuy chie U.S. climae negoiaor. He currenly holds climae change
and inernaional aairs research appoinmens a Resources or he Fuure, he
German Marshall Fund o he Unied Saes, and he Brookings Insiuion. He
also serves as he execuive direcor o he biparisan Commission on Climae and
ropical Foress. He is a prize-winning honors graduae o Harvard Law School.
Samuel Grausz is a direcor o policy and research a Climae Advisers and man-
ages is domesic energy, ransporaion, and carbon-markes pracices. He has
exensive experience working wih leading energy companies and has co-auhored
several sudies or prominen hink anks including Resources or he Fuure, he
Brookings Insiuion, and he Cener or American Progress. Grausz also holds
a research posiion a RFF where he works wih leading economiss on a broad
se o energy and environmenal policy issues ranging rom sae-level energy
eciency policies o naional carbon policy. Previously, he worked a Naional
Economic Research Associaes, an economic consuling rm where he parici-
paed in environmenal, energy, anirus, and inellecual propery cases. Grausz
received his bachelors degree in economics and poliical science magna cum
laude rom Amhers College.
Andrew Light is a Senior Fellow a he Cener or American Progress special-
izing in inernaional climae and science policy, and a proessor a George
Mason Universiy where he is direcor o he Cener or Global Ehics. He leads
he Cener or American Progresss work on inernaional climae issues includ-
ing paricipaion in he Global Climae Nework and eors involving he U.N.
Framework Convenion on Climae Change meeings. He has auhored, co-auhored, and edied 17 books including:Environmental Values published in
2008;Philosophy and Design published in 2008; Controlling echnology published
in 2005;Environmental Ethics published in 2003;Moral and Political Reasoning in
Environmental Practice published in 2003; echnology and the Good Life? published
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36 Center or American Progress | Carbon Maret Crossroads
in 2000; andEnvironmental Pragmatism published in 1996. Ligh is also co-
edior o he journalEthics, Policy, and Environment. His docoral work was a he
Universiy o Caliornia a Riverside and UCLA in ehics and public policy, and he
compleed a hree-year posdocoral ellowship in environmenal risk assessmen
in he School o Medicine a he Universiy o Albera, Canada.
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Endnotes
1 The World Ban, Turn Down the Heat: Why a 4CWarmer World Must Be Avoided (2012), available athttp://climatechange.worldban.org/sites/deault/les/Turn_Down_the_heat_Why_a_4_degree_centri-grade_warmer_world_must_be_avoided.pd.
2 Elisabeth Rosenthal and Andrew Lehren, Prots onCarbon Credits Drive Output o a Harmul Gas, The NewYork Times, August 8, 2012, available at http://www.nytimes.com/2012/08/09/world/asia/incentive-to-slow-climate-change-drives-output-o-harmul-gases.html?pagewanted=all.
3 Shanar Vedantam, kyoto Credits System Aids theRich, Some Say, The Washington Post, March 12,2005, available at http://www.washingtonpost.com/wp-dyn/articles/A28191-2005Mar11.html;Jerey Ball, U.N. Warming Program Draws Fire, TheWall Street Journal, July 11, 2008, available at http://online.wsj.com/article/SB121573736662544537.html; kathrin Hille, China Leads Race to Exploit
Trading System, Financial Times, December 1, 2009,available at http://www.t.com/intl/cms/s/7d18be32-de97-11de-ad-00144eab49a,Authorised=alse.html?_i_location=http%3A%2F%2Fwww.t.com%2Fcms%2Fs%2F0%2F7d18be32-de97-11de-ad-00144eab49a.html&_i_reerer=#axzz2PW0C6ot;Christopher Booer, The Clean DevelopmentMechanism Delivers the Greatest Green Scam o All,
Telegraph.co.u, August 28, 2010, available at http://www.telegraph.co.u/comment/columnists/christo-pherbooer/7969102/The-Clean-Development-Mecha-nism-delivers-the-greatest-green-scam-o-all.html.
4 The World Ban, State and Trends o the Carbon Maret2006 (2006), available at http://www-wds.worldban.org/external/deault/WDSContentServer/WDSP/IB/2006/09/29/000310607_20060929120548/Rendered/PDF/375790State0o1Maret0200601PUBLIC1.pd.
5 Alexandre kossoy and Pierre Guigon, State and Trendso the Carbon Maret 2012(2012), available at http://siteresources.worldban.org/INTCARBONFINANCE/Resources/State_and_Trends_2012_Web_Opti-mized_19035_Cvr&Txt_LR.pd.
6 UNEP Risoe CDM/JI Pipeline Analysis and Database,avaliable at http://www.cdmpipeline.org/.
7 Vietnam Can See Great Opportunities rom CarbonMaret, Vietnam Bridge, December 13, 2012, avail-able at http://eng lish.vietnamnet.vn/ms/environ-ment/54585/vietnam-can-see-great-opportunities-rom-carbon-maret.html; US Climate Action Networ,Whos On Board with the Copenhagen Accord (2010),available at http://www.usclimatenetwor.org/policy/copenhagen-accord-commitments; Juan Pedro Searle,Worshop on NAMAs Submitted by DevelopingCountry Parties (2011), available at http://unccc.int/les/meetings/ad_hoc_woring_groups/lca/applica-tion/pd/chile_approach_progress_in_chile.pd; FarhanHelmy, LEDS Cooperation: I ndonesias Perspective(Indonesia: National Council on Climate Change, 2012),available at http://www.mmechanisms.org/document/
SB36_sideevent_Japan/02_DNPI.pd.
8 kossoy and Guigon, State and Trends o the CarbonMaret 2012.
9 UNEP Risoe CDM/JI Pipeline Analysis and Database,available at http://cdmpipeline.org/ (last accessedMarch 2013).
10 Randall Spalding-Fecher and others, Assessing theImpact o the Clean Development Mechanism (Luxem-bourg: CDM Policy Dialogue, 2012), available at http://www.cdmpolicydialogue.org/research/1030_impact.pd.
11 Global Wind Energy Council, Global Wind Statistics2012 (2013), ava