Markets for environmental services are being advocated as solutions to local and global environmental problems. The most ambitious of environmental markets is the evolving and overlapping network of carbon markets that seek to reduce global emissions of greenhouse gases linked to climate change. This research examines why and how developing-country firms decide to participate in carbon markets. The research focuses on firm decisions to generate and sell carbon credits under the Clean Development Mechanism (CDM) of the 1997 Kyoto Protocol, in the sugar and cement sectors in Brazil and India. By comparing firms that choose to initiate CDM projects with peer firms that do not, we assess drivers of firm CDM participation, trace the processes by which firms enter new carbon markets, map firm perceptions of CDM project risks and benefits, and identify salient characteristics of the emerging carbon markets in Brazil and India. The cross-national, cross-sector comparative design enables a comparison of the effects of both level of state intervention (Brazil-high; India-low) and degree of sector concentration (cement-high; sugar-low) on firm carbon market participation. Data will be collected through context interviews with key carbon market informants and through firm interviews with approximately 150 CDM and non-CDM firms.
The research comes at a critical juncture in the evolution of US and international climate policy. Developing-country economies will play increasingly important roles in shaping international environmental treaties and determining global environmental quality. Understanding the decision and risk management processes by which developing-country firms undertake CDM projects can contribute to improving developing-country private sector support for continued international action on climate change. With negotiations for a post-Kyoto climate agreement expected to intensify in 2009 and 2010, the research will be of direct interest to national and international climate policy negotiators.
The Clean Development Mechanism is an international policy framework, established under the UN climate agreements, that allows projects in developing countries and emerging economies to be granted credits for greenhouse gas emissions reductions. In this study, we investigated CDM experiences in Brazil and India to better understand the ways that private corporations in emerging economies respond to these carbon market incentives. We conducted firm-level interviews covering approximately 150 CDM and non-CDM plants in the sugar and cement sectors in Brazil and India, focusing on how individual managers understood the potential benefits and risks of undertaking CDM investments. Our results indicate that CDM operates in a far more complex way in practice than that of simply adding a marginal increment to a project’s internal rate of return. First, although anticipated revenue played a central role in most managers’ decisions to pursue CDM investments, there was no standard practice to account for financial benefits of CDM investments; second, some managers identified non-financial reputational factors as their primary motivation for pursuing CDM projects; and third, under fluctuating regulatory regimes with real immediate costs and uncertain CDM revenue, managers favored projects that often did not fundamentally depend on carbon revenue to be financially viable. In addition, CDM provided incentives for the rapid build-up of technical capacity within the two countries. The post-2012 CDM architecture can benefit from incorporating these insights, and in particular reassess goals for strict additionality and mechanisms for achieving it. This research provides empirical and comparative insight on firm response to CDM, which allows us to evaluate the influence of policy on firm investment decisions. Project-based carbon markets will remain an important part of the policy toolkit and our research provides insight as to how companies view compliance and other incentives within that framework. Throughout this project we have been interested in conducting meaningful academic research that is relevant to inform policy. To this end, our project structure combined three complementary activities: First, to create new contributions in sociology and policy analysis; second, to train new scholars and establish the basis for meaningful and long-term international research collaborations across our three countries (US, Brazil, and India); and third, to share our work with a wider policy community through workshops and presentations and international climate policy meetings. This project has involved five graduate student researchers. We have trained two PhD students and two MPP students at the University of Maryland, and one PhD student at the University of California, Santa Barbara; the students now have expertise in quantitative data analysis and interview methods, and their application to policy. In addition, our project has created many new institutional and network connections in Brazil and India that are now open for additional research and academic exchange opportunities for our US students. The work has led to the publication of three scholarly papers and two more are in the drafting stage. Publications thus far include (a) "Hultman, N.E., S. Pulver, S. Pacca, S. Saran, L. Powell, V. Romeiro, T. Benney (2011). "Carbon Markets and Low-carbon Investment in Emerging Economies: Experiences with CDM in Brazil and India" Energy Policy, 39: 6698–6700. DOI: 10.1016/j.enpol.2011.08.006 (b) Pulver, S., N.E. Hultman, and L. Guimaraes. "Carbon market participation by sugar mills in Brazil" (2010). Climate and Development 2: 248–262; (c) Hultman, N.E., S. Pulver, R. Deshmukh, L. Guimarães, and J. Kane (2012). "Carbon market risks and benefits: Firm perceptions of CDM investment decisions in Brazil and India." Energy Policy 40: 90–102. doi:10.1016/j.enpol.2010.06.063. In addition, the research will contribute directly to two additional scholarly papers which we anticipate will be submitted for publication in 2012: (a) "International Market Mechanisms and Firm Investment Decisions: Assessing the Clean Development Mechanism" for scholarly journal in the field of policy analysis and management; and (b) "The effects of the Clean Development Mechanism on Firm Behavior: Comparing the cement and sugar industries in Brazil and India" for a scholarly journal in the field of sociology. Our international outreach involved collaborative work and presentation at academic and policy conferences. We organized two international workshops—one in Brazil and one in India—specifically to discuss the research and build cross-national communities of scholars and practitioners. The first workshop was held at the Institute for Advanced Studies of the University of Sao Paulo, Brazil, in 2010 and was entitled "International Conference on Carbon Markets in Emerging Economies." The second workshop, "The Private Sector and Climate Change: Opportunities and Challenges in Emerging Economies," was held in New Delhi, India in 2011. We also organized a panel discussion to present our research and hear from policy, business, and NGO practitioners at the UN Climate Conference in Copenhagen (COP-15) in late 2009, and also discussed the results at another panel at the subsequent UN Climate Conference (COP-16) in 2010. We have also presented the research at several professional academic conferences and invited lectures.
