Evolution of the CDM market

Both networks and conflicts presented in the preceding paragraphs lead to the reconfiguration of power dynamics and shape the evolutionary dimensions of the CDM market. Hence the market development is viewed in the research as an organic process rather than a linear progress of market size or scale. In order to capture the changing dynamics of the

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market, three elements of evolution need to be carefully examined.

Firstly, the constituency of actors in the market may vary at different stages. Companies may choose to enter or to quit a market according to their corporate strategy, but here the analytical focus has been given to the observable change of attitude or behavior pattern of a given group of private companies in their CDM related operations. For example, the entrance of large state-owned enterprises in the carbon business when CDM is gaining ground in China has been analyzed in detail in Chapter 6.

I argue that the motives and interests of the new entrants are very important indicators of whether and to what extent CDM has deviated from its original purpose.

Secondly, in addition to the actor dynamics there are the substitutes and transformations of institutions in terms of their functions and operational norms. Some public-private networks vanished from the market completely and some changed their purpose in a maturing market.

Beneck el al (2007) foresees that the public-private-partnership model of market steering in the initial stage of CDM development will inevitably give way to the transaction focused inter-business interactions once the market starts to function. This research finds ample empirical evidence for such arguments. For example, most bilateral capacity building programs at the initial stage are no longer necessary to continue once CDM business has become a fully legitimized market. Some programs,

such as the EU-China CDM Facilitation Project, have been formally finalized and other bilateral programs have changed its CDM focus to a broader climate purpose other than the CDM market. Hybrid institutions that have been established at local level to promote CDM activities, namely the local CDM offices, also need institutional change since CDM has become such a well-known idea in some localities that a promotional agency is no longer required. Some of these offices hence adopted a more marketised orientation and have established commercial wings in order to compete with other private project developers and tap CER benefits (Schroeder, 2012).

Beside the notable trend of marketization among these cooperative networks or hybrid institutions is the observable tendency of localization of the mechanism as a whole. CDM is essentially created in accordance with Annex-1 parties’ limited experience in carbon offsetting. The rules, procedures and norms are crafted at international level without careful consideration of local reality. This gap has been gradually filled as large amount of projects implemented on the local level. For example, many DOEs started to recruit local auditors and validators not only because they are notoriously short of staff, but also due to their realization that local knowledge plays a crucial role for competent validators.

In addition, the emergence of a large number of local project developers

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or consultancy companies also helps to bridge the communication gap between Annex-1 buyers and local project owners. The local voices started to be heard at the international level and changes have been made in the formal governance system. For example, project developers and local project owners are now allowed to attend the EB meetings to explain their situation, or to express their complaints and concerns about existing CDM rules or the EB’s decisions on certain projects. CDM is becoming a truly international game, even if its initiation was based on western experience.

The involvement of local inputs and integration of local interests into the CDM system leads to another form of challenge to the status quo. At the initial stage of market development, CDM was promoted as the typical example of ‘win-win’ solutions between the developed and developing countries and their companies. Government officers, academics and market participants endorsed this imported discourse repeatedly at various occasions. However, it should be noted that such framing of discourse is created at international level when the mechanism was firstly designed. The purpose is to dissipate strong suspicion and criticisms of the idea of offset mainly in the Annex-1 countries. However, CDM as a win-win solution was soon gaining prominence in China. It faces little challenge, when China’s marketization reforms have been carried out so successfully in the past two decades. CDM was unanimously supported

mainly because of its brand as ‘market’ instrument.

However, many contesting voices emerged once local interests were integrated into the mechanism. The most obvious criticism is that the CDM revenue is often too small, too difficult to achieve, and arrives too late for the real project construction, so it has little effect on investment decisions. Many project owners expressed their disappointment in CDM and some of their complaints began to be picked up by mainstream media. Their complaint echoes with the Chinese government’s ambition to establish a domestic cap and trade system. Officers consequently started to downplay the significance of CDM in China’s strategy to curb carbon emissions and promote clean development. In addition, it is generally believed that China’s time of being a carbon credits supplier is numbered. As the world’s largest GHG emitter, the country will eventually take up a binding emission reduction target sooner rather than later. In such a case, the once dissipated concern, which argues that international offset programs like CDM would exhaust China’s most cost-effective mitigation options and therefore increase its costs to meet its future emission cap, has crept back into the public discourse and is swiftly regaining ground.

In general, there are observable changes in market actors, institutions and the dominant discourse as the CDM market matures and becomes

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functional. These changing dynamics are an important element to understand the complicated nature of the internal power interface in the CDM market and their consequences. It also presents the evidence of how the carbon market is hugely influenced by external political and economic factors in a broader social context. In this regard, the evolution of the market is shaped by combined internal and external forces and factors, which also have profound implications in terms of the governance of international carbon markets in developing countries.

3.2.4. Evaluate the implications of business power in