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FEATURE: Carbon markets and the green economy – learning from the past to shape the Rio agenda

Prachi Seth is a Research Officer at the Overseas Development Institute and an expert in energy and climate finance. In this blog, written in the week of Rio+20, Prachi highlights the importance of learning from past experiences when discussing the role of market-based mechanisms and the green economy. The issues of global warming and poverty in an economically constrained environment are at the core of the challenges the global community faces today. Given these realities, numerous initiatives have been contemplated and launched to promote cleaner alternative economic paths with sustainable development as a backdrop. Challenges however remain. Emergence of the Green Economy The zero draft of the Rio+20 declaration has projected the concept of the ‘green economy’ as a future platform for sustainable development and poverty alleviation. In addition, it has reinforced the concept of payments for environmental services. This model centres on the idea that driving public and private capital towards ‘green’ (i.e. more energy efficient) investments, even within conventionally ‘brown’ industries, offers economic growth opportunities for both developed and developing countries. The underlying hypotheses are that in developed countries this growth can be achieved through education and modifying consumer consumption patterns, whilst in developing countries green growth will not detract from established economic goals and can, in fact, further contribute to their realisation by offering hereto untapped (low carbon) industries for growth. In either case, it is envisaged that a green economy approach will require significantly more private sector participation than has been the case so far. Impact of market-based mechanisms Over the last decade one of the most prominent approaches for linking markets to environmental protection and sustainable development has been the carbon market which emerged from the Kyoto protocol. By setting a globally agreed greenhouse gas emissions targets for developed countries, carbon markets allow for the trading of emissions reduction allowances or credits. This market was valued at $144 billion in 2009. There are a number of different mechanisms for trading, but one in particular – the Clean Development Mechanism (CDM) – has the explicit objective of reducing global carbon emissions while also contributing to sustainable development and poverty reduction in developing countries. The recently published report “Carbon Livelihoods: Social Opportunities and Risks of Carbon Finance takes stock of the linkages between this market mechanism and local livelihoods by assessing the existing evidence base and drawing on experience of the World Bank portfolio. The report addresses two overarching questions:

  • Do carbon projects (projects intended to generate credits for sale on carbon markets) offer livelihoods opportunities or present risks, and what are these?
  • Do the attributes of carbon financing alter the nature of livelihood opportunities and risks?

These markets have been recognised as a promising new source of finance with the potential to sustain larger capital flows than traditional aid mechanisms. They have also, in some cases, led to new opportunities for those involved in projects, such as employment, improved local environmental protection and new income streams from activities such as timber production. The principles underlying participation in these markets have also been cognisant of ‘additionality’ thereby ensuring that the environmental impact is not lost at any point in the pursuit of the economic targets. However, global experiences have also highlighted a number of questions to be considered as we think about the way forward. First the unpredictability and volatility of carbon prices has reflected a state of speculation on the ‘commoditisation of nature’ that has clear social implications, such as Reducing Emissions from Deforestation and Forest Degradation (REDD+). Secondly, the opportunities created for the poor (such as employment) seem to have been limited to certain types of projects (e.g. forestry and small-scale energy projects) and their participation is limited by constraints arising from project design and implementation. A majority of these market-based projects (including those within the World Bank portfolio) are of large scale industrial projects that provide lesser opportunity to the poor for participation or employment benefits given their focus on cost-effective emissions reductions as a primary objective. Thoughts on the direction being contemplated As we consider the emerging ‘green economy’ paradigm, there seems a much more explicit recognition of the role of the private sector than ever before, and also the mainstreaming of environmental service trading mechanisms. This has been justified on the basis that it is indeed the private sector that controls a majority of financial, technological and commodity resources. While this cannot be disputed, it is also important to note that the primary motivation of private sector involvement has, and will be profit.  As indicated above, our analysis of livelihood opportunities in the CDM framework paradigm highlighted the predominance of large projects – simply because those were the only ones that can meet the required return rates. In my opinion, this new proposal of merging carbon markets within a broader green economy will leave the poor more vulnerable to market risks, unless there is a strong regulatory and consistent governance framework in place. This is supported by clear evidence that CDM projects have so far failed to offer many new opportunities for the poor and may in fact increase exposure to those market risks that have been so prominent in the global financial crisis, particularly because carbon markets are still in an era of experimentation. To avoid the pitfalls of the past, we need to reflect on the lessons we have learned thus far, such as (a) what mechanisms will help guide short-term profit motives towards sustainable business models with potentially longer pay-offs and (b) what monitoring mechanisms are necessary to ensure  local community level opportunities are being created etc. In the absence of a market governance mechanism, participants will be free to define their own self-serving structures, which could take away from the “the future we want”. Finally, before we, as a global community, ‘sign-up’ to an additional developmental framework, we need to ensure that all the other debates focus on local development – i.e. Millennium Development Goals and Sustainable Development Goals – are connected and aligned or else we risk having ‘more of the same’ with little to show at the end. We occasionally invite bloggers from around the world to provide their experiences and views. The views expressed here are those of the author, and not necessarily those of CDKN. Image courtesy of Centre for International Forestry Research (CIFOR)   We  invite bloggers from around the world to share their experiences and views. The views expressed here are those of the author[s], and not necessarily those of CDKN.

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