Tackling climate change by emission trading and its odds as a sustainable path for climate policy in the 21st century according to the liberal institutional approach within regime theory

Master Thesis International Relations & International Organization specialization International Political Economy

written by Miriam Joanna Ries supervision by Dr. Sami Faltas

Title of Thesis:

Tackling climate change by emission trading and its odds as a sustainable path for climate policy in the 21st century according to the liberal institutional approach within regime theory

Main research question:

Is emission trading a sustainable market-based-mechanism to tackle climate change in

the long term when analysed from the perspective of a liberal institutional approach within

regime theory?

List of abbreviations

AAU = Assigned Amount Units

APP = Asia Pacific Partnership

BASIC countries = block of four large developing countries and

rising economies; Brasil, South Africa, India, China CBRD&RC principle = Common but differentiated responsibilities and

respective capabilities principle

CDM = Clean Development Mechanism

CERs = Certified Emission Reductions: Emission units and

Currency of Clean Development Mechanism

COP = Conference of the Parties of the UNFCCC

CTCN = Climate and Technology Centre and Network

DNA = Designated National Authority

ERUs = Emission reduction units

ETS = Emission trading system

EUAs = EU Allowances

EU ETS = European Union Emission Trading System

ERU = Emission reduction unit

GHG emissions = Greenhouse Gas Emissions

GDP = Gross domestic product

IPCC = Intergovernmental Panel on Climate Change

JI = Joint Implementation mechanism

MATCH process = Modelling and assessment of contributions to climate change

MDGs = Millennium Development Goals

MVR = Measuring, reporting and verification

NAPA = National Adaptation Programmes of Action

OP = Offset Production

REDD++ = Reducing emissions from deforestation and forest

degradation in developing countries

SD = Sustainable Developmental

TT = Technology Transfer

UNFCCC = United Nations Framework Convention on Climate

Change

Table of contents

1. Introduction 4

1.1 Problem definition 4

1.2 Short introduction to emission trading 7

1.3 The theoretical lens 8

2. Main discussion divided into sub-questions 11

2.1 First sub-question: Can the emission trading system be seen as a favourable, functioning method that drives innovation and what are its merits in comparison to other mechanisms to tackle climate change seen from a liberal perspective within regime theory?

11

2.1.1. An analysis of the advantages and disadvantages of the emission trading system.

11

2.1.1.a. The mechanism of the emission trading system 11

2.1.1.b. Economic factors and trading 12

2.1.1.c. Linkage 14

2.1.1.d. Technological innovation 15

2.1.2. A critical discussion whether emission trading creates technological innovation and participation incentives.

16

2.1.2.a. Allowance allocation 16

2.1.2.b. Incentives for innovation 17

2.1.2.c. An analysis of free allocation 17

2.1.2.d. Auctioning as a distributive alternative 19

2.1.3. A critical comparison with other mechanisms to tackle climate change. 21

2.1.3.a. Objectives for the CDM system 21

2.1.3.b. Technology transfer within the CDM system 22 2.1.3.c. An analysis of incentives in the CDM system 23

2.1.3.d. Performance of the CDM system 24

2.1.3.e. Joint implementation and the CDM system 26

2.1.4. Conclusion for the first sub-question. 29

2.2 Second sub-question: Can an economic and social process of learning be documented with respect to the application of the emission trading system since the Kyoto Protocol came into force? What can therefore be expected in the next period until 2020 and in the longer term, when we look at it through the lens of regime theory?

30

2.2.1. An analysis of how the system has developed within the search for sustainability and how it is effected by the application of political and social factors.

30

2.2.1.a. Evolution of emission trading in the global arena 30

2.2.1.b. Striving for the common good 31

2.2.2. An analysis of the prospects for the effectiveness of emission trading and the Kyoto Protocol until 2020 and in the longer term through the lens of the liberal institutional approach of regime theory.

33

2.2.2.a. Members of the emission trading system 33

2.2.2.b. Beyond the Kyoto Protocol 34

2.2.2.c. The effects of interdependence 36

2.2.3. A critical reflection on whether emission trading as a mechanism of an international regime can still be functioning as such even after the defection of the largest emitter of greenhouse gases. Does this show that the Prisoner´s Dilemma can not be overcome as the liberal institutional stance within regime proclaims?

38

2.2.3.a. The role of scientific knowledge 38

2.2.3.b. The role of the U.S. 38

2.2.3.c. The role of China 41

2.2.3.d. Global and national regimes 42

2.2.4. Conclusion for the second sub-question. 44

2.3 Third sub-question: Should the countries of the global South have the right to increase their emissions in the course of their development just as the Northern countries did in the past as seen from a liberal institutional point of view within regime theory?

45

2.3.1. A critical analysis of how historic responsibility of the North affects the mitigation and adaptation process and on what role the North-South divide plays in the issue of emission trading.

45

2.3.1.a. Common responsibility 45

2.3.1.b. Historical responsibility 46

2.3.1.c. Responsibilities for the North and South 48

2.3.2. A critical reflection on what role the emission-saving technologies by the North, which the South currently does not possess, play in the emission trading system.

51

2.3.2.a. Differentiated responsibilities 51

2.3.2.b. The need for a changing approach by the South 52

2.3.3. A discussion on whether the North has the duty to give the South the chance to develop by emitting more greenhouse gases like the Northern countries did in the past, because the North has much better practical options to attain a lead in energy- saving industry in the long-term.

54

2.3.3.a. Global alliances 54

2.3.3.b. BASIC countries opening new pathways and closing the gap 55

2.3.4. Conclusion for the third sub-question. 59

3. Main conclusion and answer to central research question 60

4. Literature 62

1. Introduction

1.1 Problem definition

Climate change has been a frequently and vigorously debated issue in the past decades and can be seen as one of the most pressing problems of the 21

century. The global temperature has risen by around 0.75°C over the past 100 years and within the wide variation of forecasts from the currently available models, it is projected to increase further by 1.1°C to 6.4°C over the course of this century.

In the September 2014 issue of the Greenhouse Gas Bulletin, the World Meteorological Organization published research results showing that carbon dioxide levels increased more between 2012 and 2013 than during any other year since 1984, which they linked to steadily increasing carbon dioxide emissions combined with a reduced carbon dioxide uptake by the earth's biosphere.

The effect of additions of greenhouse gases by human activities to the atmosphere since the Industrial Revolution has been estimated to be ten times that of fluctuations in solar radiation.

Without new policies, it is forecasted that greenhouse gas emissions will increase by about 37% in 2030 compared to 2005 levels, with a wide range of impacts on natural and human systems.

Most recently the IPCC has released the second instalment of its Fifth Assessment Report on impacts and vulnerabilities of climate change on 31

of March 2014.

It implies an overwhelming evidence on the scale of these impacts.

Due to climate change, poverty and economic shocks will increase, which in turn will raise the risk of armed conflict among nations.

The negative consequences of climate change for the global ecosystems, quality of drinking water and wildlife, will also be immense.

Furthermore the patterns of rainfall, melting snow and ice will change, which will cause floods and erosions due to rising sea levels.

Scientific evidence of global warming has doubled since the last IPCC report in 2007. Thus, ignorance is no longer a suitable excuse.

1 European Comission on Climate Action, Retrieved from:

http://ec.europa.eu/clima/policies/brief/consequences/index_en.htm . 2 World meterological Organization, Retrieved from;

http://www.wmo.int/pages/mediacentre/press_releases/pr_1002_en.html

3 Government of Canada, Causes of Climate Change, Retrieved from: .http://www.climatechange.gc.ca/default.asp?

lang=En&n=65CD73F4-1

4 OECD Environmental Outlook 2030, Retrieved from: www.oecd.org/publishing/corrigenda p.139 5 UNFCCC website, IPCC: https://unfccc.int/2860.php

6 BBC News – Science and Environment, http://www.bbc.com/news/science-environment-26814742 7 UNFCCC website, IPCC: https://unfccc.int/2860.php

8 BBC News – Science and Environment, http://www.bbc.com/news/science-environment-26814742

The fundamental subject in this report is the shift towards the idea of thinking about the treatment of climate change as a worldwide problem in managing risks.

It is essential for the entire planet´s future to diminish human induced carbon emission and intelligently use the tools we have, in order to put a halt to the accelerated process of global warming. It is a classic example of a challenge which transcends national boundaries. No matter where greenhouse gases (GHGs) are emitted, the impacts of climate change will be global. Whilst action needs to be taken by governments nationally, this can only be effective within a framework of concerted collective international action.

It demands a coherent international approach, which can overcome the obstacles of different national regulations and tackle the issue in an overarching manner.

Emission trading was introduced as a market-based mechanism and therefore an economic way to deal with the problem. It may be questioned whether this approach can be a lasting path for tackling climate change in the 21

century. In 1988 the international community launched a cooperation on the matter of climate change in the UN by creating the International Panel on Climate Change (IPCC).

This initiative was the starting point of collective action towards tackling global warming in the international community. Ever since then a gradually growing cooperation on the topic has enabled the set up of a number of extensive joint ventures. The IPCC has also played a leading part in the creation of the United Nations Framework Convention on Climate Change (UNFCCC),

which entered into force in 1994.

The UNFCCC then became the central international treaty to reduce global warming and deal with the consequences of climate change.

From the UNFCCC to the implementation of the emission trading system, as one of the mechanisms of the Kyoto Protocol, it has been a long and rocky road. In order to achieve this goal all parties committed themselves to adopting national policies and measures on the mitigation of climate change by limiting their emissions, as well as protecting and enhancing its sinks and reservoirs.

In this research we analyse the function, potential and possibilities of the emission trading system as a manner of approaching the issue of climate change.

9 BBC News – Science and Environment, http://www.bbc.com/news/science-environment-26810559

10 OECD (2011), “Climate change”, in Better Policies for Development: Recommendations for Policy Coherence, Retrieved from: http://dx.doi.org/10.1787/9789264115958-13-en, p.34.

11 IPCC- Intergovernmental panel on Climate Change, Retrieved from:

http://www.ipcc.ch/organization/organization_history.shtml#.UPf4nvIcQww 12 Ibid.

13 United Nations Framework Convention on Climate Change, Retrieved from:

http://unfccc.int/essential_background/convention/items/2627.php

14 BBC – Climate Change, Kyoto Protocol, Retrieved from: http://www.bbc.co.uk/climate/policies/kyoto.shtml 15 Egenhofer, Christian, “The future of the international climate change regime: The contribution of regional

approaches towards an international climate change agreement”, Centre for European Policy Studies CEPS) Brussels, International Forum for Environmental Issues, Tokyo, 3-5 March 2004, p.4.

In the first chapter of this research paper the focus will lie on the multitude of practical, political and economic advantages, as well as disadvantages of the emission trading system that can be identified since its establishment. Furthermore we will raise the question whether the emission trading system is capable of driving technological innovation and creating participation incentives.

Finally an analysis of the other two mechanisms of the Kyoto Protocol to reduce greenhouse gases will be made, namely the project based Clean Development Mechanism (CDM) and the Joint Implementation system (JI), whereby the focus will be laid on the CDM, since it plays a more significant role in the international practical reality.

These different systems incorporate different mechanisms with various effects. It is debatable which of these mechanisms might be the most effective to achieve the above stated goals of the Kyoto Protocol.

In the second chapter the attention will turn to the question whether an economic and social process of learning and growth can be documented in the time frame after the Kyoto Protocol came into force and whether or not an improvement can be expected in the next period until 2020. It will be discussed whether emission trading as a mechanism of international regime can still be functioning as such even after key global players and main emitters have declined from the Protocol.

In this context the question arises whether the national and local emission trading commitments can be viewed as an extension or alteration of the emission trading system of the Kyoto Protocol. The liberal institutional approach argues that the spread of scientific understanding will do most to facilitate regime building.

Hence, it could be questioned whether this theory can be proven to be applicable in this case, as scientific knowledge has increased but nevertheless the Kyoto Protocol has lost important members with previously binding targets. Eventually the focus will be laid on the question whether emission trading is a promising system until the next deadline in 2020 or whether an alternative approach will be necessary in the future.

Finally, in the third chapter of this thesis the main focus lies on the North-South divide. The attention will be on the question whether the countries of the South should have the right to increase their emissions in the course of their development, just as the Northern countries did in the past. In this context the discussion will include practical options of the North to attain a lead in energy- saving industries in the long term. Furthermore the issue of historic responsibility will be addressed

16 United Nations Framework Convention on Climate Change, Retrieved from:

http://unfccc.int/kyoto_protocol/mechanisms/items/1673.php.

17 Baylis, John/ Smith, Steve & Owens, Patricia, “The Globalization of World Politics – An introduction to international relations”, Oxford University Press, New York, 2011, Chapter 18 “ International regimes” p.303.

and how it plays a role in the challenge of adaptation and mitigation. Also the question of whether emission trading is a sustainable system with regard to this divide between the developing and developed countries will be an important aspect of this discussion.

1.2 Short introduction to emission trading

The establishment of the emission trading system through the Kyoto Protocol in 1997

was a big step in finding a coherent international answer to climate change by mitigation. It is also a step towards international regime formation. The Kyoto Protocol differentiates between Annex-I, Annex-II and developing countries. The Annex-I countries refer to the industrialized countries and economies in transition, whereas the Annex-II countries include the developed countries which pay for costs of developing countries.

The Annex-I countries have ratified the Protocol and have committed to reduce their emission levels of greenhouse gases to targets that are mainly set below their 1990 levels under the control of the UNFCCC.

This distinction between the duties of the developed and developing countries is one of the main foundations of the emission trading system, enshrined in the Common but Differentiated Responsibilities of the Kyoto Protocol.

This thesis will focus on the role of the emission trading system, since it is the only flexible market- based system to tackle climate change that has been consolidated by a binding contract in form of the Kyoto Protocol, which has evolved to become International Law.

It is important to notice that these circumstances put the emission trading system in a special position because greenhouse gas emissions can be seen as a new commodity. Parties with commitments under the Kyoto Protocol have accepted targets for limiting or reducing emissions. These targets are expressed as levels of allowed emissions and are divided into “assigned amount units” (AAUs). The trading of emissions allows countries to sell the spare emission units as an excess capacity to countries that are over their targets.

The emission trading system also exists outside the Kyoto Protocol and as such it also plays a pivotal role in the international environmental governance.

18 United Nations Framework Convention on Climate Change, Retrieved from:

http://unfccc.int/kyoto_protocol/items/2830.php .

19 Climate Change Connection, United Framework on the Convention of Climate Change, Retrieved from:

http://www.climatechangeconnection.org/Solutions/UNFCCC.htm .

20 Climate Change Connection, United Framework on the Convention of Climate Change, Retrieved from:

http://www.climatechangeconnection.org/Solutions/UNFCCC.htm .

21 BBC- Climate Change, Kyoto Protocol, Retrieved from: http://www.bbc.co.uk/climate/policies/kyoto.shtml . 22 International Emission Trading - UNFCCC, Retrieved from

http://unfccc.int/kyoto_protocol/mechanisms/emissions_trading/items/2731.php.

1.3 The theoretical lens

The focus of this research will lie on the analysis of the emission trading system and its sustainability as a path to tackle climate change in the long run, by using the structural analysis of regime theory. Regime theory attempts to analyse the formation of rule-governed activity in the anarchic international system. According to the definition given by Krasner, regimes are “a set of implicit or explicit principles, norms, rules, and decision-making procedures around which actors´

expectations converge in a given area of international relations”.

More specifically we could say that regime approaches are devoted to explaining the mechanisms and procedures through which nation states, in the absence of a world government or supranational authority, seek to regularize behaviour in a given issue.

The attempt to explain under which conditions effective cooperation in environmental issues can occur at an international level is most frequently made by using the theoretical approach of regime theory. The international community has established a set of institutions, which can be defined as environmental regimes according to the Krasner´s definition stated above.

The UNFCCC was the first regime to organize an international response to climate change.

The Kyoto Protocol was intended to act as the first major rule-governed institution within the climate change regime and set binding targets within a certain dead-line for the signing parties.

The mechanism of emission trading can in itself be seen as an international regime, no matter whether it is embedded in the Kyoto Protocol or established on another level. Since the emission trading system concerns specific rules and norms within a decision-making procedure and is based on certain expectations the actors have within that system it is functioning as an international regime.

Regime theory is located in two broad schools of thought: realism and liberalism.

In this research I have chosen to apply a liberal institutional approach. The liberal institutional approach turns to microeconomics and game theory (the Prisoner´s Dilemma) when trying to explain why anarchy

23 Baylis, John/ Smith, Steve & Owens, Patricia, “The Globalization of World Politics – An introduction to international relations”, Oxford University Press, New York, 2011, Chapter 18 “ International regimes” p.303 24 Okereke, Chukwumerije/ Bulkeley, Harriet, Durham University, “Conceptualizing climate change governance beyond the international regime: a review of four theoretical approaches” Tyndall Centre for Climate Change Research, Working Paper 112, Oktober 2007, p.5.

25 Williams, Mark S./ Rorison, Julie, “Conversations on the Regime and the Institution: The Copenhagen Accord and Global Environmental Governance”, Bridges: Conversations in Global Politics: Vol.1: Iss. 1, Article 4, 2012, p.52.

26 Ibid, p.53.

27 Baylis, John/ Smith, Steve & Owens, Patricia, “The Globalization of World Politics – An introduction to international relations”, Oxford University Press, New York, 2011, Chapter 18 “ International regimes” p.297.

impedes the formation of regime theory.

The mechanism of emission trading occurs in the international environment, which is an anarchic system. This circumstance entails a higher difficulty of establishing and maintaining a solid collaborative strategy among states.

The Prisoner´s Dilemma addresses this difficulty by referring to the theoretical stance that states fail to pursue collaborative strategies because they expect the other members of the anarchic system to pursue competitive strategies. This kind of behaviour leads to a suboptimal outcome. The liberal institutional approach of regime theory tries to demonstrate that anarchy inhibits collaboration and indicates that states acknowledge the advantages of collaboration.

It does that by pointing out that there can be a mechanism which will convince all the actors that there is no danger of defection, since states have accepted the fact that the collaborative strategy leads to an optimal outcome and can avoid sub-optimal outcomes in the long term.

The liberal institutional approach within regime theory also draws attention to the importance of scientific knowledge and how this facilitates regime building.

Climate change and the progress of the emission trading systems is tightly related to the growth of scientific understanding. This influences how states deal with the issue of climate change and the intensity of engagement in emission trading systems. Here we should keep in mind that the relation of the growth of scientific understanding of climate change with the establishment of political and legally binding relations is an important issue to be discussed with respect to the social learning process of states within emission trading. For these above mentioned reasons it is interesting to look at this research from a liberal institutional stance within regime theory.

28 Baylis, John/ Smith, Steve & Owens, Patricia, “The Globalization of World Politics – An introduction to international relations”, Oxford University Press, New York, 2011, Chapter 18 “ International regimes” p.301.

29 Ibid, p.302-303.

30 Ibid, p.303.

Main research question:

Is emission trading a sustainable market-based - mechanism to tackle climate change in the long term according to liberal institutional approach within regime theory?

Sub-questions:

1

.Sub-question:

Can the emission trading system be seen as a favourable, functioning system that drives innovation and what are its merits in comparison to other mechanisms to tackle climate change as seen from a liberal perspective within regime theory?

2

.Sub-question:

Can an economic and social process of learning be documented with respect to the application of the emission trading system since the Kyoto Protocol came into force? What can therefore be expected in the next period until 2020 and in the longer term, when we look at it through the lens of regime theory?

3

.Sub-question:

Should the countries of the global South have the right to increase their emissions in the course of

their development just as the Northern countries did in the past seen from a liberal institutional

point of view within regime theory?

2. Main discussion within sub-questions

2.1 First Sub-question

Can the emission trading system be seen as a favourable, functioning method that drives innovation and what are its merits in comparison to other mechanisms to tackle climate change as seen from a liberal perspective within regime theory?

2.1.1.: An analysis of the advantages and disadvantages of the emission trading system.

2.1.1.a: The mechanism of the emission trading system

A compliance system, such as the emission trading system, is part of the climate regime, a broader international institution. Studies of regime effectiveness have shown that institutions can influence behaviour that is relevant to addressing international challenges, such as climate change, in several distinctive ways.

According to the liberal institutional view the creation of institutions is a way of overcoming the international anarchic system by creating a set of rules, as well as decision making- procedures that enable cooperation. The climate change regime operates as such an institution in a mainly anarchic international system and is meant to create an overarching international network.

When analysing the regime formation in the global climate change negotiations, one obvious advantage of the mechanism of emission trading instantly comes to mind. In a global scenario, where there are no systems to restrict the emission of greenhouse gases, every country and firm would have carte blanche to emit. In a case like this the prospects for climate change would be worse off. I will argue that with the process of globalization a scenario as described above would entail tremendous consequences for the global environment in the long term. The economic growth of especially the BASIC countries and other developing societies is the breeding ground for more pollution and emission of greenhouse gases in the future.

Since the first scientific findings on climate change have been published, the establishment of climate change regime including an emission trading system as a concept had been put on the international agenda within the last 25 years. This led to a growth of the general public awareness of the environmental consequences of human behaviour. The wide-spread public awareness evokes a

31 Hovi, Jon/ Stokke, Olav/ Ulfstein, Geir “ Implementing the Climate Regime: International Compliance” published by Earthscan 2005, p.4.

sense of responsibility on the international stage that leads countries and the world economy to come into to action. We can assume that this is a significant benefit resulting from the establishment of the emission trading system.

The Kyoto Protocol and i.a. its market-based mechanism of emission trading was intended to act as the first major institution within the climate change regime and produced an agreement between states on reducing emissions within a specific time-line. It proclaimed a commitment to build on the existing policy towards a more substantive and profound institution.

Even if it might not be clear yet how effective emission trading will be, we can see these steps as a crucial element for a forum and lobby to develop more effective tools for tackling climate change. Therefore I see the Kyoto Protocol as an essential starting point. From a liberal institutional perspective we can identify the reduction of greenhouse gases and the further establishments of local emission trading systems within the climate change regime as a practical demonstration of states that are not only preoccupied with relative gains, but also with cooperation that can result in mutual benefits,

since the establishment of such a forum mainly creates operational possibilities for future common actions to preserve the public good of clean atmosphere.

2.1.1.b. Economic factors and trading

In order to create a sustainably functioning system in the long run, the emission trading system needs to imply economically motivating factors for the participating parties. It has done so in cases of an even allocation of permits to two emitters, since both parties have an incentive to trade, if the cost of reduction is higher for one party than for the other.

Emitters, whose emission control costs are higher, can buy units for a lower price than the creation of energy saving technologies.

Conversely emitters, whose emission control costs are low because they are in possession of emission control technologies, can sell their units and make a profit. Therefore this positive overall effect of financial flexibility creates a profitable situation for each party and fuels the incentive to trade. Most significantly it allows the involved parties to lower the total cost for each regulated facility

and thereby spur cost-effectiveness. Hence I conclude here that the emission trading system fuels an economic dynamic that stimulates competitiveness and leaves room for each party

32 Williams, Mark S./ Rorison, Julie, “Conversations on the Regime and the Institution: The Copenhagen Accord and Global Environmental Governance”, Bridges: Conversations in Global politics, Vol.1, Iss.1, Article 4, p.53.

33 Burchill, Scott, Chapter 3 “Liberalism”, from Theories of International Relations, 4^th edition 2009, p.67.

34 Pew Centre on Global Climate Change, Climate Change 101: “Understanding and Responding to Global Climate Change”, Retrieved from: http://www.c2es.org/docUploads/Cap&Trade.pdf , p.1.

35 Ibid, p.1.

to search for the most profitable path. Furthermore the market-based system of emission trading leaves another scope for financial options, namely the opportunity to bank or borrow allowances.

Thereby it creates mechanisms for inter-temporal trading. Banking is a mechanism that gives the program administrators or covered entities the option to use in the current year allowances that will be issued in the future year, under the condition that they will “pay back” these allowances, possibly with interest, by reducing more emissions in the future

. We can certainly view this as a crucial positive effect, since it limits the party´s options to emit on low costs in the future and therefore might additionally create incentives for technological innovation. Borrowing means the ability to buy allowances from a future trading period during an earlier trading period. While in theory, borrowing can significantly enhance economic efficiency of achieving a cumulative cap, concerns over impact of this instrument on policy consistency exist.

Moreover it includes the hazard that program administrators or firms will fail to pay back the borrowed allowances and the emission cap could thus be exceeded.

On the other hand such flexibility of inter-temporal trading potentially might reduce price volatility

and create a more stable economic foundation from which investments in greener technologies and trade options can be navigated. The inter-temporal trading takes future uncertainties into consideration and gives a chance to better cope with higher allowance prices in the future. The mutual benefits that most likely arise from this system function on the basis of economic interdependence. When we analyse according to the liberal stance of Kant we can proclaim that unhindered commerce between different parties and players would make them realize their fundamental community of interests and create substantially improving situations for states than pursuing self-sufficiency.

In the case of the emission trading system each party is provided with sufficient margin of appreciation and flexibility by the incentives to trade, which will create a healthy competitive environment. Also the mechanisms of borrowing and banking provides sufficient economic flexibility and therefore can create the most cost-efficient results. The economic motivation within emission trading is mainly based on free trade and thus sustains the liberal perspective that free trade and layers of economic interdependence create more optimal results for each party. The difficulty that arises when trying to cover the entire scope of existing sources, is to

36 Pew Centre on Global Climate Change, Climate Change 101: “Understanding and Responding to Global Climate Change”, Retrieved from: http://www.c2es.org/docUploads/Cap&Trade.pdf , p.1.

37 Brunner, Steffen/ Flachsland, Christian/ Luderer, Gunnar/ Edenhofer, Ottmar “ Emission trading system: an overview”, Potsdam Institute for climate impact research, Retrieved from: http://www.pik-

potsdam.de/members/brunner/publications/emissions-trading-overview p. 12.

38 Pew Centre on Global Climate Change, Climate Change 101: “Understtanding and Responding to Global Climate Change”, Retrieved from: http://www.c2es.org/docUploads/Cap&Trade.pdf , p.5.

39 Ibid, p.5.

40 Burchill, Scott, Chapter 3 “Liberalism”, from Theories of International Relations, 4^th edition 2009, p.64.

monitor sources that are too small or difficult to supervise. It would make the program of emission trading too administratively complex. Therefore these sources might be addressed more efficiently through other regulatory mechanisms.

In order to address a wide scope of emissions it is necessary that the emission trading system is adjusted in a way that it covers also small sources. In this case an additional policy support will be required and local emission trading systems come in to place that branch away from the Kyoto framework. I will address the role of local emission trading systems in the course of this paper. The lack of capacity to widely cover all kind of sources leads to another aspect of emission trading, which needs to be assessed when thoroughly analysing the system advantages and disadvantages, namely the mechanism of linkage.

2.1.1.c.Linkage

Linkage is a multifaceted policy decision mechanism that can be used by political jurisdiction to achieve a variety of objectives. Linkage can occur at a unilateral or multilateral level. In order to fully comprehend what linkage means, it must be clear that allowances and credits only exist as electronic entries in a registry.

A linkage of two emission trading schemes has occurred when a participant in one of the schemes can use an allowance or credit issued by the administrator of either scheme for compliance. An example for a unilateral link may be that Norway accepted Phase- I EU allowances (EUAs) for compliance purposes, but the EU Emissions Trading Scheme (EU ETS) did not accept Norwegian allowances.

We can speak of a multilateral link if each party agrees to accept allowances or credit issues by the other scheme for compliance.

The last ten years have seen the growth of linkages between many of the world´s emission trading systems for greenhouse gases both directly between systems, and indirectly via connections to credit systems such as the Clean Development Mechanism.

Even 20 years after the launch of the United Nations climate change regime, global emissions continue to rise. Progress is being made at the domestic level, however, and in many cases, the system of choice remains emission trading. One of the major challenges going forward in policy making is linking these emerging trading systems to achieve the efficiencies of an integrated global greenhouse gas market.

The legal and institutional

41 Burchill, Scott, Chapter 3 “Liberalism”, from Theories of International Relations, 4^th edition 2009, p.64.

42 Mehling, Michael/ Haites, Erik, “Mechanisms for linking emissions trading schemes”, Climate Policy, Vol.9, Iss.2, 2009, p.169-184, p.171.

43 Ibid, P.170.

44 Ibid, P.170.

45 Ranson, Matthew/ Stavins, Robert N. “Linkage of Greenhouse Gas Emissions Trading Systems: Learning from experience”, Harvard Kennedy School, John F. Kennedy School of Government, Faculty Research Working Paper Series, Prepared for the Harvard Project on Climate Agreements, November 2013, RWP13-046, p.5.

46 Pew Centre on Global Climate Change, Climate Change 101: “Understanding and Responding to Global Climate Change”, Retrieved from: http://www.c2es.org/blog/burgesss/linking-emissions-trading-programs-can-advance-

arrangements of linkage to create an operational link between different emission trading schemes, offers the potential to achieve the aggregate emissions cap of the linked schemes at lower cost by increasing the range of available mitigation options across borders. Furthermore it can create a larger, more liquid market for allowances.

Therefore the option of linkage can establish a financial flexibility and provide the parties with a broader spectrum of choices to mitigate in a manner that suits the individual source and establish a global framework for action. In order for the linkage to be effective it is necessary that the compatibility of the schemes is sustained. Thus, it requires a process of agreeing on revisions to the regulations of the linked schemes.

Here, the hazard of linkage lies in the possible rise of emissions. This could happen, if a scheme with a price cap is linked with another scheme and this causes the market price to rise above the price cap. In that case actual emissions will be higher than under independent operation.

For this reason the compliance of the systems is a vital aspect of the mechanism of linking.

2.1.1.d. Technological innovation

A crucial advantage of linking emission trading systems can also be seen in the creation of a larger market for new technologies.

The realist perspective within regime theory asserts that if states found themselves in situations in which they would be all better off cooperating with one another, it remained the case that states were concerned about the relative gains that would accrue from cooperation.

I like to state in this context that the phenomenon of linkage would be highly unlikely and states would strive to remain to themselves in their national emission trading systems. Yet, linkage is a widespread method of improving the effects of emission trading and as states above, enhances financial flexibility as well as the establishment of a global framework of action. What occurs with linkage of emission trading systems is what states do according to the liberal institutional stance, namely create institutions in order to reduce the governance costs associated with autonomous decision-making.

This leads to the essential issue of whether emission trading generally creates incentives for technological innovation.

climate-policy.

47 Mehling, Michael/ Haites, Erik, “Mechanisms for linking emissions trading schemes”, Climate Policy, Vol.9, Iss.2, 2009, p.169-184, p.169.

48 Ibid p.170.

49 Ibid p.170.

50 Pew Centre on Global Climate Change, Climate Change 101: “Undertstanding and Responsing to Global Climate Change”, Retrieved from: http://www.c2es.org/docUploads/Cap&Trade.pdf p.5.

51 Reus-Smit, Christian/ Snidal, Duncan, “The Oxford Handbook of International Relations”, NewYork: Oxford University Press, 2008, p.210.

52 Ibid, p.209.

2.1.2.: A critical discussion whether emission trading creates technological innovation and participation incentives.

2.1.2.a. Allowance allocation

The incentive to create new energy saving technologies is widely seen as one of the main advantages of emission trading schemes. Therefore we can say that the market-based mechanism has the capability to drive innovation. It presumably motivates the private sector to continually innovate and seek new emission-trading technologies.

As we have already seen, the mechanism of banking can potentially create an incentive for technological research, but in order to analyse thoroughly whether this assumption can be supported with substantial arguments, it is necessary to take a closer look at the mechanisms of allowance allocation.

The allowance allocation takes place after the cap has been determined. The emission trading system operator issues allowances for units of emissions where the total number of permits equals the cap. Then the allocation of allowances takes place either by being sold, usually through auction, or by being allocated for free.

There are two options how the free allocation of emissions can be achieved, which is by grandfathering or benchmarking.

Grandfathering allowances means that permits are distributed in proportion to past emissions, measured for one or several years. In this system grandfathering can either be a one-off allocation to existing sources, or be regularly updated with new emissions data. Benchmarking constitutes a method where allowances are distributed on the basis of an average or expected performance benchmark.

For practical reasons, preference is often given to a system of grandfathering, as it does not imply an income transfer from the private to the public sector.

One major concern about grandfathering is that some parties may receive more allowances than actually needed, while others may get too little, which may lead to trade in grandfathered allowances and, hence, to substantial capital transfers between these parties.

An outreaching effect of such transfers may be that it could raise questions or opposition to allocating allowances for free and thereby reducing the socio-political acceptability of emission trading based

53 Pew Centre on Global Climate Change, Climate Change 101: “Understanding and Responding to Global Climate Change”, Retrieved from: http://www.c2es.org/docUploads/Cap&Trade.pdf , p.3.

54 Brunner, Steffen/ Flachsland, Christian/ Luderer, Gunnar/ Edenhofer, Ottmar “ Emission trading system: an overview”, Potsdam Institute for climate impact research, Retrieved from http://www.pik-

potsdam.de/members/brunner/publications/emissions-trading-overview p.10.

55 Ibid, p.10.

56 Ibid, p.10

57 Sijn, J.P.M./ Smekens, K.E.L./ Kram T./ Boots, M.G. “Economic effects of grandfathering CO2 Emission Allowances” study of Energy Research Centre of the Netherlands – ECN-C-02-022, April 2002, p.11.

58 Ibid, p.5.

on grandfathering.

Consequently this could discourage participation as well as form a disincentive to invest in emission trading models.

2.1.2.b. Incentives for Innovation

When analysing the factors for creating an innovation incentive, it is useful to take a closer look at what is meant by innovation. Innovation implies a non-obvious departure from prior practice, which in the case of environmental controls can mean that it has the potential to reduce the cost of pollution control or make it possible to perform basic economic functions with less pollution than existing approaches.

With respect to the allocation of allowances by grandfathering or benchmarking, the implication of incentives to refrain from old practices and strive towards new technological possibilities may be questionable.

We can argue that a major disincentive for innovation is the expectation that the baseline year upon which all allocations are based will be updated, which may encourage sources to invest in dirty technologies or refrain from investing in clean technology in order to increase or maintain emission levels and thereby receive more free allocations in the future.

Thus, this mechanism may dampen the willingness of participating countries to invest in research for new technologies and create a loophole for remaining in a comfort zone of well-known economic and technological procedures. It may even lead into the opposite direction and encourage to focus on overhauled technologies and worsen the ecological situation in the long run.

2.1.2.c. An analysis of free allocation

When examining the principle of emission trading by free allocation it is essential to take into the equation that this model implies sellers and buyers of emissions. These two positions entail different economic viewpoints. The parties which are in the position of the seller have an incentive to make extra emission reductions under emission trading so that they can sell credits and make a profit.

However, buyers of credits do not have an incentive for innovation when the price of credits is

59 Ibid, p.5.

60 Driesen, David, “ Does Emission Trading Encourage innovation?” 33 ELREnvironmental Law Institute, ELR News and Analysis, I-2003 p.10094-10107, p.10094.

61 Brunner, Steffen/ Flachsland, Christian/ Luderer, Gunnar/ Edenhofer, Ottmar “ Emission trading system: an overview”, Potsdam Institute for climate impact research, Retrieved from http://www.pik-

potsdam.de/members/brunner/publications/emissions-trading-overview p.10.

62 Driesen, David, “ Does Emission Trading Encourage innovation?” 33 ELREnvironmental Law Institute, ELR News and Analysis, I-2003 p.10094-10107, p. 10095.

below the cost for developing new energy saving technologies.

In auction markets on the other hand all emitters are buyers and all sources benefit from low-carbon technologies via decreased marginal abatement cost and permit prices.

Therefore an auction market has a dynamic that fuels innovation and nurtures an economic stimulus. We have to take one other important aspect of the trading model into consideration, namely that the buyer has an incentive to purchase the cheapest credits possible. Consequently the rational seller will only generate credits that cost less to produce that the control cost of prospective buyers and credits with which the seller must compete.

Therefore the seller will strive to generate credits by low costs. We have to keep in mind that useful innovation frequently costs a lot at the outset, but the cost of using innovations falls as producers learn better production techniques and realize savings through economies of scale.

In this form of the system such investments are not encouraged and an expensive innovation which might be a foundation for reducing emissions cheaply in the future is not seen as favourable by the seller and therefore mostly will not be chosen since it does not produce a short-term benefit. According to these findings a seller might be more encouraged to strive for innovation than a buyer, but is also inhibited by competition with other sellers to produce cheap credits, which does not fuel innovation, but dampens initiatives for technological development.

Moreover the mechanism of free allocation has the disadvantage that it may present a barrier to market entry and reducing competition, because current polluters receive allowances for free, but new polluters must pay for them. At the same time it may present a barrier to market exit. The requirement that an installation must be kept open in order to receive free allowances may prevent the closure of inefficient plants, freezing emissions at higher levels than otherwise necessary.

This forms another disincentive for innovation and leaves the market in a rigid and immobile position.

Free allocation presents another difficulty, namely that it spurs lobbying. Since emission allowances of monetary value are given out for free, lobbying of powerful producer groups may put governments under considerable pressure, which poses a costly and long winded procedure.

63 Brunner, Steffen/ Flachsland, Christian/ Luderer, Gunnar/ Edenhofer, Ottmar “ Emission trading system: an overview”, Potsdam Institute for climate impact research, Retrieved from; http://www.pik-

potsdam.de/members/brunner/publications/emissions-trading-overview p.10.

64 Driesen, David, “ Does Emission Trading Encourage innovation?” 33 ELREnvironmental Law Institute, ELR News and Analysis, I-2003 p.10094-10107, p.10097.

65 Driesen, David, “ Does Emission Trading Encourage innovation?” 33 ELREnvironmental Law Institute, ELR News and Analysis, I-2003 p.10094-10107, p.10097.

66 Brunner, Steffen/ Flachsland, Christian/ Luderer, Gunnar/ Edenhofer, Ottmar “ Emission trading system: an overview”, Potsdam Institute for climate impact research,Retrieved from; http://www.pik-

potsdam.de/members/brunner/publications/emissions-trading-overv p.10.

67 Ibid, p.10.

Lobbying can be viewed as an essential political obstacle that further hinders the fair and well considered distribution of allowances. It thereby also hinders the motivation of influential firms, which produce a big bulk of the emissions, to find other solutions than obtaining as many credits as possible.

In this case, the lens of liberal institutionalism does not hold its promises of states` functionality within regimes and their striving towards relative gains, rather than maximizing their absolute gains through collaboration.

The competitive situation in the case of free allocation leads to the pursuit of selfish gains that dampens the production of common and mutual beneficial goals, which claim some forfeits for the sake of reciprocal goods. This shows that despite many advantageous developments and features of emission trading there remain some downsides of the climate change regime, which can be, according to these findings, viewed as results of power motivated intentions.

These motivations hamper cooperation and optimum results.

Yet, the liberal institutional view itself also acknowledges that cooperation between states is likely to be tenuous and limited, particularly where enforcement procedures are weak and cheating brings gains.

From a liberal institutional point of view these power motivated actions of abuse can be part of a system that otherwise does promote collaboration and the achievement of optimum results, even if these flaws of the system occur. Moreover we can see here that within free allocation of emission trading systems it is much more difficult to establish enforcement procedures, since it implies weak points that are open for abuse, which are difficult to prevent. Thereby the incentive for innovation is endangered by these weaknesses within the free allocation, even if the system also produces positive results.

2.1.2.d. Auctioning as a distributive alternative

However, there is another manner of allocating units within an emission trading system. Taking a closer look at the mechanism of auctioning, we can recognize that this mechanism puts upfront costs on polluters, which will tend to enhance managements` awareness of carbon costs, leading to more efficient decisions.

Furthermore it enables governments to use revenues to address equity issues through reductions in taxes or other distributions to low-income households. Especially the investment in the development and deployment of cleaner technologies has to be noted as a major

68 Burchill, Scott, Chapter 3 “Liberalism”, from Theories of International Relations, 4^th edition 2009, p.67.

69 Burchill, Scott, Chapter 3 “Liberalism”, from Theories of International Relations, 4^th edition 2009, p.67.

70 Ibid, p.10.

advantage of auctioning.

Therefore we can think of auctioning as a mechanism of allocating credits, which provides strong and substantial incentives for prosperous technological and developmental innovation.

From a liberal institutional perspective states can prevent the uneven flow of capital and promote environmental sustainability by reforming institutions.

We can witness these developments within the mechanism of auctioning units, since it includes provisions that hinder abuse and support the common striving towards improving emission-saving technologies and equitable distribution of units. Therefore I argue that from a liberal institutional point of view auctioning is an institution that enables states to collaborate and enhances their ability to solve emission reduction issues in a joint effort.

71 Ibid p.10.

72 Baylis, John/ Smith, Steve & Owens, Patricia, “The Globalization of World Politics – An introduction to international relations”, Oxford University Press, New York, 2011, Chapter 18 “ International regimes” p.127.

2.1.3.: A critical comparison with other mechanisms to tackle climate change.

2.1.3.a. Objectives of the CDM system

Next to the emission trading system, which is a market-based mechanism, the JI (Joint Implementation Program) and the CDM (Clean Development Mechanism) form the two project- based mechanisms that support the carbon market.

The CDM plays a much more significant role in practice, therefore the focus of this study will lay on the CDM mechanism.

The CDM allows a country with an emission-reduction or emission-limitation commitment under the Kyoto Protocol to implement an emission reduction project in developing countries. These projects can earn saleable certified emission reduction credits, which can be counted towards meeting Kyoto targets and must provide emission reductions that are additional to what would otherwise have occurred.

Here the Certified Emission Reductions (CERs) are the currency of the CDM system. They are the measure of the quantity of emissions that has been avoided (“offset”) by the use of CDM projects.

The tandem objectives of the CDM are to assist developing countries in achieving SD (Sustainable Development) and assist the developed countries itself to meet their own emissions reduction targets under the Protocol, through OP (Offset Production) in a host developing country.

Thus, the CDM is perceived as a carefully balanced ´package´ that likewise reflects the interests of developing and industrialized countries.

Nevertheless it remains questionable whether this balance can last and whether the mechanism keeps its economic, socio-political and developmental promises.

However, as a project-based mechanism the CDM will continue beyond the first Protocol period from 2008-2012.

Its foremost objective is to create opportunities for the developed countries to enhance the GHG emissions in developing countries by setting up projects in the host countries.

When analysing the functionability of CDM it is necessary to take a closer look at what OP and SD

73 United Nations Framework Convention on Climate Change, Retrieved from:

http://unfccc.int/kyoto_protocol/mechanisms/items/1673.php

74 United Nations Framework Convention on Climate Change, Retrieved from:

http://unfccc.int/kyoto_protocol/mechanisms/clean_development_mechanism/items/2718.php .

75 Wara, Michael W. / Victor, David G., “A Realistic Policy on International Carbon Offsets”, Stanford University, Freeman Spogli Institute for International Studies, Program on Energy and Sustainable Development, Working paper, nr.74, p.9.

76 Sutter, Christoph, Sutter/ Parreno, Juan Carlos, “Does the current Clean Development Mechanism (CDM) deliver its sustainable development claim? An analysis of officially registered CDM projects.” Climate change (2007) Vol.84, Iss.1. pp.75-90, p.75.

77 Torvanger, Asbjorn/ Shrivastava, Manish Kumar/ Pandey,Nimisha/ H.Tornblad Silje, “ A two-track CDM: improved incentives for sustainable development and offset production”, Climate Policy , Vol.13, Iss.4, 2013, p.471-489, p.472.

78 Ibid, p.472.

is meant to look like. The OP is meant to create SD and support the creation of a baseline in the non-Annex I countries for future ecological practice. OP through a CDM project must satisfy two preconditions: environmental and economic additionality.

Examining the benefits of the offset production I like to mention that one can sequester and reduce greenhouse gases where ever it is easiest as long as there is a measurable impact on the carbon cycle.

Thus there might be less obstacles to introduce an emission reducing mechanism and less entry barriers for firms than in the classical emission trading system, where specific pre-conditions are determined and must be followed.

Furthermore the offset production can imitate major shifts in attitudes and technologies in the developing world that set the stage for socio-technological and political transitions to low carbon futures and participation in international agreements.

Comparing this possible effect of the CDM with the common emission trading system, the transfer of technological development as well as potential rise of awareness of climate change is much more direct in the offset production of emission reduction projects. This is due to the immediate contact with the circumstances and conditions of the developing country. Thus, I like to point out that here a first hands-on experience for the developing country is possible and creates a very concrete starting point for future input from the developing country itself and initiate sustainable development.

2.1.3.b. Technology transfer within the CDM system

With respect to the creation of incentives for technological development, the TT (Technology Transfer) of a CDM project has to be examined more carefully. Under the CDM regime, a foreign investor finances (some of) the cost of implementing new technologies.

Here, the SD objectives of many countries appear in the form of a demand for sustainable energy technology, which has led to an “increased emphasis on TT issues in the CDM”.

According to a rather liberal definition of technological transfer, it might not require that the technological capability of a host country will be enhanced and/or might allow the commercial transfer of a single component technology, to count as

79 Ibid, p.473.

80 Liverman, Diana M., Chapter 11 “Carbon offsets, the CDM and sustainable development”, Retrieved from:

http://www.environment.arizona.edu/files/env/profiles/liverman/nobelcausebookchapter112.pdf p. 133.

81 Liverman, Diana M., Chapter 11 “Carbon offsets, the CDM and sustainable development”, Retrieved from:

http://www.environment.arizona.edu/files/env/profiles/liverman/nobelcausebookchapter112.pdf p. 133.

82 Hagem, Catherine, “The Clean Development Mechanism versus the international trading permit: the effect on technological change”, Statistics Norway, Research Department, Discussion Paper No.521, Nov.2007, p.6

83 Torvanger, Asbjorn/ Shrivastava, Manish Kumar/ Pandey,Nimisha/ H.Tornblad Silje, “ A two-track CDM: improved incentives for sustainable development and offset production”, Climate Policy , Vol.13, Iss.4, 2013, p.471-489, p.475.

technology transfer. This explains why the scope of technological transfer and whether a project is successful is dependent upon host-country priorities and national conditions.

Therefore the degree of technological transfer is dependent on individual aspects, which can widely vary from country to country. I like to emphasize once more that the lack of a fixed internationally valid definition, in this case of technological transfer, provides discretionary powers, which are too wide and may weaken the standards for development and progress.

Comparing the incentive for technological development of the CDM with the one of the emission trading system it is also important for us to note that the host of a CDM project is supposed to receive all the net income from the project.

However, it is also likely that investors seek to profit from their investments and as stated above, the profits flow outside of the host country. A strengthening of the CDM rules most likely improve environmental integrity, which generally led to lower investments in environmentally friendly technologies.

Consequently the level of technological innovation is dependent on the manner of allocation of allowances within the emission trading system.

2.1.3.c. An analysis of incentives in the CDM system

To sum up I state that producers in the developing countries have a lesser incentive to invest in new technology under a CDM regime than under a emission trading regime. When we analyse these developments through the lens of liberal institutionalism we see that the aim of the creation of regimes is the joint gains arising from these cooperative solutions to the problem of providing public goods

such as a clean atmosphere. This is based on the objective to support sustainable development in the host country and enhancing technological transfer, as well as providing an option for the developed country to earn saleable certified emission reduction credits. Therefore these goals are partly reached in practice. Yet, the lack of a fixed definition weakening the sustainability standards provides a loophole for abuse.

Through the lens of liberal institutionalism within regime theory the CDM system is partly effective in creating mutual beneficial outcomes in some cases. Nevertheless the realist perspective on the matter seizes the situation of the CDM mechanism more realistically, since the power exercised by the developed nation, leads to less fertile joint results, but instead brings about a rather one sided

84 Ibid, p.475.

85 Torvanger, Asbjorn/ Shrivastava, Manish Kumar/ Pandey,Nimisha/ H.Tornblad Silje, “ A two-track CDM: improved incentives for sustainable development and offset production”,Climate Policy, Vol.13, Iss.4, 2013, pp.471-489,p.475.

86 Baylis, John/ Smith, Steve & Owens, Patricia, “The Globalization of World Politics – An introduction to international relations”, Oxford University Press, New York, 2011, Chapter 12 “Environmental issues”, p.359.

beneficial situation by profits flowing outside of the host country. Turning to the feasibility of sustainable development in the host developing countries, it is necessary to at first state cleary what SD is supposed to mean. The developing countries were concerned that uniform criteria and standards for SD in a CDM setting would infringe on their own sovereignty. For this reason the CDM failed to fix a definition of SD.

The absence of international sustainable development standards creates several difficulties and flaws in the CDM system. Here the question arises whether in practice future input from the developing country itself is feasible.

First of all the competition among developing countries in attracting CDM investments could create an incentive to set low sustainable development standards in order to attract more projects with low abatement costs.

Thus the highly competitive supply side of the CDM is likely to cause a trade-off in favour of the cost-efficient emission reduction objective and neither developed nor developing countries have direct incentives to implement strict sustainable development criteria.

In the emission trading system on the other hand this risk is minimal, since it is very clear how high the reduction of emissions must be like. The path to achieving these reductions create a market that is concerned to cost-effectively lower the emissions of GHG. However, a reduction at the expense of developmental progress is not possible by defining sustainable development at one´s own discretion. Once again we can see that the benign image of the economic market

of liberal institutionalists within regime theory has not fully materialized in the CDM mechanism. Repeatedly I argue that the parties seek relative gains rather than a mutual beneficial outcome. But this time the cause lies with the developing countries. In this context I like to emphasize that the realist perspective gives the more factual sight on the circumstances.

2.1.3.d. Performance of the CDM system

Moreover there is another downside to the CDM system with regard to its verifiability. No validation is required after the initial letter of approval given by the relevant DNA (Designated National Authority) regarding whether a CDM project has actually performed as intended.

The

87 Torvanger, Asbjorn/ Shrivastava, Manish Kumar/ Pandey,Nimisha/ H.Tornblad Silje, “ A two-track CDM: improved incentives for sustainable development and offset production”,Climate Policy, Vol.13, Iss.4, 2013,pp.471-489,p.473.

88 Sutter, Christoph/ Parreno, Juan Carlos, “Does the current Clean Development Mechanism (CDM) deliver its sustainable development claim? An analysis of officially registered CDM projects.” Climate change (2007) Vol.84, Iss.1. pp.75-90, p.76.

89 Ibid, p.76.

90 Baylis, John/ Smith, Steve & Owens, Patricia, “The Globalization of World Politics – An introduction to international relations”, Oxford University Press, New York, 2011, Chapter 18 “International regimes” p.301.

91 Torvanger, Asbjorn/ Shrivastava, Manish Kumar/ Pandey,Nimisha/ H.Tornblad Silje, “ A two-track CDM: improved incentives for sustainable development and offset production”,Climate Policy, Vol.13, Iss.4, 2013, p.471-489, p. 473.