Mobilising finance for climate change mitigation: private sector involvement in international carbon finance mechanisms



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MOBILIsING FINANCE FOR CLIMATE Change MITIGATION: PRIVATE SECTOR INVOLVEMENT IN INTERNATIONAL CARBON FINANCE MECHANISMS


Jolene Lin*1 and Charlotte Streck2

This article examines the role of non-state actors in the climate change regime, particularly the role that the private sector plays in the implementation of the United Nations Framework Convention on Climate Change and the Kyoto Protocol. The international carbon market serves as an example of how the direct regulation by international law of the activities of private entities poses certain challenges to the traditional state centric conceptual paradigm of international law. This article discusses the following issues: first, while the text of the Kyoto Protocol clearly includes provisions to facilitate private sector participation in the Kyoto Protocol mechanisms, the lack of safeguards for private sector concerns is indicative of the prevailing state centric mentality amongst international law-makers. Second, the failure to design rules and institutions to adequately protect private interests threatens the legitimacy and effectiveness of the Kyoto Protocol mechanisms. This proposition is already borne out by current developments concerning the Clean Development Mechanism Executive Board. We prescribe a number of reforms to address the situation, such as professionalising the Executive Board and introducing administrative rules. Finally, we build upon the discussion of non-state actors as subjects of international regulation to make certain proposals for the emerging international mechanism focused on reducing emissions from deforestation and forest degradation in developing countries.

Contents

INon-State Actors in the Climate Change Regime 8


Introduction

The declining importance or centrality of the state in international law has been the subject of extensive discussion.3 Scholars have debated whether globalisation, in the sense of increasing transnational movement of people, goods, information, pollution and capital, has had an erosive effect on the sovereignty of states, a cornerstone of the international legal order. In making their case, proponents of this viewpoint generally refer to two developments. First, states today voluntarily or otherwise find themselves subject to international regulation or governance beyond the state,4 which impinges upon the areas where they were previously free from external influence. Second, the leading role of states as actors on the international plane is challenged by intergovernmental organisations (‘IGOs’), non-governmental organisations, businesses, epistemic communities, and even private individuals that exercise significant influence over or are actively involved in the creation, implementation and enforcement of international norms today. Yet other scholars argue that the role of the state has in no way diminished but merely evolved,5 or that the state continues to ‘remain at the epicenter of international law’.6

This article takes these strands of scholarship as a starting point to examine the role of non-state actors in the climate change regime, particularly the role that the private sector plays in the implementation of the United Nations Framework Convention on Climate Change7 and the Kyoto Protocol to the United Nations Framework Convention on Climate Change.8 The role and influence of the non governmental sector in the processes of international environmental law making have been the subject of detailed academic analysis over the past decade.9 The participation of non-state actors in the processes of generation, interpretation and application of international norms has generally been seen as enhancing the legitimacy of international law.10 This article will leave the discussion on the role of non-state actors in the shaping of rules to others, and focus on an emerging role of the private sector in the international system: the private sector as the subject of international regulation. Departing from the Westphalian notion of international law as an affair between sovereign states, we will examine the international market in greenhouse gas (‘GHG’) emissions rights (the so-called carbon market) as an example of how direct regulation by international law of the activities of private entities poses certain challenges to the traditional state centric conceptual paradigm of international law.

This article advances the following claims. First, while the text of the Kyoto Protocol clearly includes provisions to facilitate private sector participation in the Kyoto Protocol mechanisms — Joint Implementation (‘JI’), the Clean Development Mechanism (‘CDM’) and International Emissions Trading — the lack of safeguards or consideration for private sector concerns is indicative of the prevailing state centric mentality amongst international law makers. Further, the rules, institutions and the very property right that is the subject of private sector transactions in international carbon markets are created by the Kyoto Protocol with the consent of states. Following this logic, the Kyoto Protocol mechanisms only permit and facilitate the involvement of non-state actors in order to help states meet their legal obligations under the Kyoto Protocol. In short, the focus remains on states and their needs.11 Second, the failure to design rules and institutions that provide sufficient protection for the rights and interests of private non-state participants in the Kyoto Protocol mechanisms threatens their legitimacy and effectiveness.

This proposition is already borne out by current developments concerning the Executive Board of the CDM (‘Executive Board’). The Executive Board is the de facto regulator of the CDM, and in playing this role, it makes decisions that affect the rights and interests of private entities. However, it does so without fulfilling due process requirements, such as giving reasons for a decision and affording parties affected by its decisions the right of appeal. Discontent with this state of affairs has already surfaced, with some project developers threatening legal action against the Executive Board and the UNFCCC Secretariat.12 We attempt to prescribe a number of reforms to address this situation, such as professionalising the Executive Board and introducing administrative rules.

Finally, we build upon the discussion of non state actors as subjects of international regulation, and our analysis of the CDM, in order to make certain proposals for the emerging international mechanism focused on Reduced Emissions from Deforestation and Degradation (‘REDD’) in developing countries. An international REDD mechanism is discussed in the context of a post-2012 climate agreement. While referring to carbon markets as a source of finance, most of the proposals for a REDD mechanism are state centric and neglect the conditions necessary for carbon markets to function and private capital to be mobilised. A lesson that can be drawn from current market conditions relating to the CDM is that investors perceive the risk of faulty action by an international body such as the Executive Board as being lower than the equivalent risk relating to national governments of countries that have poor governance indictors (which is the case for the majority of countries with high deforestation rates). Therefore, in order to create an effective REDD mechanism, we argue that a governance structure that relies on the delegation of power and control to an international review mechanism should be created to administer the REDD mechanism when it emerges. In this regard, parties to the UNFCCC should contemplate the delegation of certain elements of power to an internationally established market regulator. Provided that such a regulator is properly equipped with powers and able personnel, it may be an appropriate means to encourage participation by the private sector in a future REDD mechanism.

Part of this article provides a general introduction to the role that non-state actors play in international law. Part is explanatory in nature and sets out the conceptual origins of private sector involvement in the Kyoto Protocol mechanisms. Part presents an analysis of the CDM as a regulatory arena in which the Executive Board is effectively the market regulator, which has coopted or delegated additional regulatory functions to other actors who consequently play quasi-regulatory roles. This analytical framework sets the stage for the more prescriptive analysis wherein we make specific recommendations to promote more effective regulation by the Executive Board, including more transparent decision making processes to address project developers’ need for due process and certainty. These recommendations include professionalising the Executive Board; more ‘conversations’ between regulated entities and the Executive Board; and the introduction of an appeals mechanism through which project developers can seek review of Executive Board decisions. In Part , we examine the proposals for a REDD mechanism in the future and argue that to the extent that a REDD mechanism will rely on private carbon markets for mobilising finance, the establishment of an international regulatory body will be necessary.

Private Actors in International Law

International law is, by definition, state centric. States are the principal actors on the international stage and a salient feature of international law is that most of its rules aim at regulating the behaviour of states, not of individuals.13 However, sub national (and supranational) entities increasingly play a role in the international law sphere, and do so in a variety of ways. Thus, while the conduct of states continues to determine the rules of international law, whether by treaty or practice, what has emerged is that states have opened the doors to allow others some limited level of international sovereignty. Modern states recognise the ability of other actors to have rights and duties on the international plane, a status that, while certainly not equal to that of states, is sufficient for those actors to participate in the formation, implementation, and even the enforcement of international law.14

The involvement of non-state actors on the international scene is not a recent phenomenon. Historic examples of non-state actors that have left their mark on the international legal system include medieval political structures, religious institutions, commercial entities such as the East India Company and other chartered bodies engaged in colonial enterprise.15 Steve Charnovitz’s work on the long history of NGO participation in international governance provides a fascinating and comprehensive account of the profound influence that NGOs have had on the scope and content of international law.16 However, what is new is the variety of non-state actors, their geographical range and their degree of influence — partly due to the media and the information technology revolution.

Non-State Actors as Law-Makers

Non-state actors contribute to and influence the creation of international legal norms. States can involve private entities in law-making by including them in national delegations to negotiate and adopt treaties. NGOs, trade associations (or business NGOs which are defined as ‘interest groups that unite several companies to campaign for a specific point of view’)17 and other private actors frequently serve as observers in conferences to negotiate various multilateral treaties. Although they generally do not have a role in formal negotiations or a treaty’s final adoption, as observers, accredited NGOs may speak before the conference, make proposals and substantially influence the outcome of the negotiations.18

Non-state actors also actively participate in law-making as signatories to non binding memoranda of understanding or binding agreements that establish initiatives or lead to the adoption of rules that guide certain aspects of the behaviour of (initially) the parties to the relevant agreement. Such agreements can be concluded among private or between private and public entities. The UN Global Compact19 is a good example of a public–private partnership that brings together companies, UN agencies and civil society in the quest for corporate social responsibility in the areas of human rights, labour, anti corruption and the environment.20 Governments have also aimed to institutionalise environmental protection not only through classic instruments (such as administrative law and criminal law) but also by concluding agreements (sometimes dubbed ‘regulatory agreements’) with companies or industries to reduce their pollution.21 When resorting to regulatory agreements, governments are prioritising the use of persuasive power above that of coercive authority.

Non-state actors are also actively involved in the development of standards and codes of conduct that are increasingly incorporated into law, the most prominent example being the standards developed by the International Organization for Standardization.22 In the context of the CDM, private entities develop and elaborate upon the methodologies that guide the calculation of GHG emissions reduction. Such methodologies are validated by private accredited auditors (Designated Operational Entities (‘DOEs’) in CDM terminology) and adopted by the Executive Board. They then become standards that are freely available for use by any entity that is developing a comparable project activity.

In terms of enforcement, NGOs and think tanks often carry out investigations and publish reports on how states are complying with their international legal obligations. This occurs most often in the human rights context and to a lesser degree in the environmental context.23 Supranational regimes rarely confer direct enforcement powers upon private actors. Within the World Trade Organization, for example, only states have standing and only member countries may formally raise complaints. The World Bank Inspection Panel allows qualifying non-state actors to hold the World Bank accountable for actions that cause or threaten to cause serious harm to the complainants and that are inconsistent with the World Bank’s own operational policies and procedures.24

It is now recognised that much of international governance is no longer primarily between states. Instead, it is occurring among specialised government agencies, which are increasingly networking with their counterparts abroad and in the process, are sharing information, ideas and policies.25 Thus, the shift in power and attention does not only include private actors but also includes shifts within the public sector from formal interstate forums of cooperation towards cooperation between agencies, departments and civil servants of different governments.26

Traditionally, non-state actors have not had rights and obligations bestowed directly upon them by the international system. Any international legal rights or obligations that non-state actors may have would usually be acquired through the state. For example, a private business may undertake to fulfil the regulatory requirements established by the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal,27 but it does so because it is complying with the domestic laws of its home state, which have been promulgated by the state to fulfil its international legal obligations under the Basel Convention.28 As such, the international legal obligations upon states may entail domestic regulation of the actions of non-state actors within their jurisdictions, but that is conceptually different from positioning non-state actors directly under international legal obligations. In this manner, non-state actors have not traditionally been direct ‘addressees’ of international law. This is changing however, and corporations are increasingly recognised as actors at the international level, with the capacity to bear some rights and duties under international law. They have rights under bilateral investment treaties, and are subject to duties under civil liability conventions dealing with marine pollution.29 International climate law is another example of an international law regime that directly regulates private actors (making them ‘addressees’ of international law), thereby posing certain challenges to the traditional state centric paradigm of international law.

Delegation of Authority to the International Level

In a world that is increasingly interdependent, a growing set of international bodies coordinate, and also regulate, responses in fields such as security, development, banking, immigration and refugees, and environmental protection. By delegating authority to the international level, national authorities shift the locus of decision making and regulatory responses to the international level. Non-state actors therefore find themselves increasingly exposed to direct contact with international bodies administrating certain tasks or public programmes.

Such delegation is not unproblematic as the increased distance between the legitimised law-makers (the national governments) and the executive bodies to which significant powers have been delegated poses the risk of deficits in control and accountability.30 Discomfort about the delegation of authority to distant officials adds to concerns about inadequate checks and balances on the international level to the extent that the lack of democratic foundations for international bodies creates serious legitimacy issues.31 While delegated decision-making in the domestic context exists within a broader rule based system, the accountability regime in the international realm is much thinner. As Daniel Esty points out, there are various forms of legitimacy that support authority and bolster the political acceptance of decisions taken by those bodies. He argues that legitimacy flows from democratic selection, but also from decisions that result in welfare gains, and from due process, order and the deliberative processes that lead to a certain decision.32 Some of these sources support each other, others may be conflicting. Where democratic legitimacy is missing, it is important that legitimacy is enhanced by procedural safeguards that promote a widely accepted method of policymaking. Such procedures often form part of the toolbox of administrative law and premise decision-making on notions of predictability, fairness, transparency, rationality, stability, neutrality and efficiency.33

The transfer of responsibilities from the national to the international level is most problematic when non-state actors become subjects of international law. In an increasing number of instances, international bodies make decisions that have direct legal consequences for individuals or firms without any intervening role for national government action.34 Examples of mechanisms and areas wherein decisions by international bodies directly affect non-state entities include the system of UN targeted sanctions; United Nations High Commissioner for Refugees (‘UNHCR’) determinations of refugee status of individuals; and accreditation of NGOs by UN agencies to participate in their procedures; and, of course, the CDM.

Private Sector Involvement in the Kyoto Protocol Mechanisms


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