6.3.1 Emergence of the Institutional Complex on Carbon Pricing

The first cases of carbon pricing occurred long before the establishment of international institutions that would support such efforts. It was only following the introduction of carbon markets in the Kyoto Protocol that the first institutions were introduced specifically to promote carbon pricing. These were transnational business coalitions, most noteworthy IETA, that cover particularly finance and energy corporations and environmental NGOs, and are often highlighted as a key factor in the early diffusion of carbon markets (Meckling Reference Meckling2011a; Paterson Reference Paterson2012). These early carbon-pricing institutions promoted carbon markets as the solution to climate change and were important in the adoption of carbon markets in the European Union and US states; particularly in California and the northeastern states (Meckling Reference Meckling2011a; Paterson Reference Paterson2012). The UNFCCC played an important role both in defining carbon markets as a key policy instrument in the Kyoto Protocol and in subsequently promoting and defining the rules for offsets within the Kyoto Protocol framework (see discussion of the offsets in Section 6.4.1).

Yet, most of the carbon-pricing institutions that are currently active have been established since 2007. Recently, institutions promoting carbon pricing have proliferated, rather than solely carbon markets. This indicates a significant, yet under-explored, new development in the international governance of carbon pricing. It is important to note that this surge in carbon-pricing institutions involves public actors to a much larger degree than the initial carbon-market promoters, as discussed in the sections to follow. As we will show, the differences among these approaches reflect variations in how the underlying core norm of reducing emissions through pricing is interpreted.

6.3.2 The Core Norm of Carbon Pricing

The core norm of carbon pricing is based on the notion that climate change is best mitigated by giving emitters an incentive to reduce emissions in terms of a price signal, and that the decision of how to reduce emissions is best left to the market. These notions are, in turn, underpinned by the understanding of actors as economically rational, and of the response to climate change as compatible with liberal and capitalist systems.

Yet, while this core norm is fundamental to all carbon-pricing policies and efforts to promote carbon pricing, it can in practice be interpreted in rather diverging ways. In an institutional complex in which several institutions with different memberships are embedded within the climate-energy nexus, there is scope for diverging and even conflicting applications of this norm. We therefore distinguish four dimensions along which interpretations of the core norm may vary: quantity versus price instruments, whether polluters should pay for all of their emissions or not, mandatory versus voluntary schemes, and carbon pricing within a given jurisdiction versus offsetting. For each dimension, we discuss how the institutions have interpreted the dimension in practice.

First, on the most basic conceptual level, there is a key distinction between placing the costs of the externality of climate change on the polluters (Pigou Reference Pigou1932; Jacobs Reference Jacobs1997) – thus also adhering to the ‘polluter pays principle’ (OECD 1974) – and between creating a system to allocate property rights to emit greenhouse gases, as well as to the trading of these rights (Coase Reference Coase1960; Felli Reference Felli2015). While carbon taxes explicitly constitute taxation, the tax component of carbon markets with auctioning consists of the money that polluters have to pay to the state (or other auctioning entity) for each emission allowance, and is hence more implicit. Nonetheless, this tax component is easily identifiable to the industry sectors that have to purchase the allowances (Rabe and Borick Reference Rabe and Borick2012).

Furthermore, carbon markets regulate the quantity of emissions, while carbon taxes regulate the price of emissions. This distinction between quantity and price instruments led Meckling and Jenner (Reference Meckling and Jenner2016) to argue that whereas carbon markets are rooted in neoliberalism and a US-dominated tradition of policy making, carbon taxes are rooted in ordo-liberalism and the European policy-making tradition. According to Meckling and Jenner, the former tradition delegates more authority to market forces since it creates a new regulatory market. Yet, we are not convinced by the association between carbon taxes and ordo-liberalism, since Pigou was a Keynesian economist and since carbon taxes are preferred over carbon markets by all kinds of economists worldwide (including neo-classical ones). This is due to its more direct imposition of the externality on the polluter (Rabe and Borick Reference Rabe and Borick2012).

While all institutions have promoted carbon markets, carbon taxes have almost solely been established by public and especially hybrid institutions, most notably the CPLC and the PMR. This is unsurprising given that the private institutions in question have been established to promote functioning carbon markets (with the exception of the C4C, which advocates that companies set an internal shadow carbon price). A more interesting development is an apparent move away from focusing almost solely on carbon markets to increasingly promoting carbon taxes in parallel. We will discuss this development further when focusing on the World Bank institutions in a subsequent section.

Second, there is a distinction between whether polluters must pay for all of their emissions – as they do in systems with a carbon tax and in emissions-trading systems in which all allowances are auctioned – or whether polluters only pay for emissions above a given baseline – as they do in emissions-trading systems with free allocation (so called grandfathering; see Aldy and Stavins Reference Aldy and Stavins2012) and in case of voluntary offsets. These two options constitute parts of a continuum, with several carbon-market policies operating somewhere in between. For example, most of the world’s emissions-trading systems combine grandfathering and auctioning of allowances. Mandatory carbon taxes nonetheless always imply that all emissions are subject to the polluter paying for them. In terms of concrete interpretation, most of the institutions do not hold an explicit official position in this regard. This may be explained by the fact that a bulk of institutions that promote carbon markets would meet less support for their efforts if they explicitly preferred full pricing of all emissions.Footnote ¹

The third conceptual dimension is whether carbon pricing is mandatory or voluntary. Carbon pricing has been adopted either in the form of mandatory schemes that cover all entities within particular sectors operating within the polity (states, sub-national entities such as provinces, and supranational entities such as the EU), or as voluntary schemes (mainly carbon markets) joined by companies that would like to commit to reducing or offsetting their emissions. Unlike most other mitigation policies, mandatory carbon pricing provides revenue for the public budget, a characteristic appealing to powerful finance ministries and politicians facing budgetary constraints. Voluntary carbon markets, on the other hand, refer to institutionalized markets that are responsible for trading those verified emissions reductions (VERs) that are not part of the regulatory schemes under the Kyoto Protocol and the EU ETS (Benwell Reference Benwell2009; Segerson Reference Segerson2013).

The voluntary carbon-trading actions of this sector are thus constituted of the activities of organizations or individuals taken outside of, in addition to, or beyond the existing environmental policies or basic environmental laws and regulations on carbon emission and trading. Operating independently from the UNFCCC emission targets and offset mechanisms, the voluntary carbon-trading markets are led by various public and private actors and follow standards created by its industrial stakeholders. Besides offering opportunities to engage in emissions trading and to enable genuine reduction of carbon emissions that could potentially exceed the goals set by mandatory carbon-trading markets, there are several other motivational factors for engaging in voluntary carbon-trading measures. In reaction to the normative pressure from NGOs or externally existing regulations to reduce emissions, actors can use carbon-trading measures to fulfil corporate social responsibility (CSR) goals and to realize marketing opportunities in line with liberal environmentalist goals and values (Lyon and Maxwell Reference Lyon and Maxwell2007; Benwell Reference Benwell2009). The voluntary carbon market therefore plays an influential role for the private sector as it focuses on individual consumers and green consumerism (Lyon and Maxwell Reference Lyon and Maxwell2007; Choi Reference Choi2015). However, voluntary schemes are often established in relation to existing regulatory schemes, which means that they may undermine the process of establishing successful mandatory policies (Lyon and Maxwell Reference Lyon and Maxwell2003; Segerson Reference Segerson2013).

The institutions analyzed here have not explicitly taken a stance on whether mandatory or voluntary approaches are preferable. Most public and hybrid institutions (except the C4C) work mainly with mandatory policies, whereas IATA_COP and, to some degree, the Gold Standard and the NCM work with voluntary carbon markets or voluntary offsets. The different involvement in either regulatory or voluntary carbon pricing reinforces the divide between public actors such as the UN, the World Bank Group, and closely related state regulations and policies on the one hand, and the private actors referring to business corporations and individual consumers on the other hand. Within some areas, most notably aviation, there has been a development to move from voluntary standards (IATA_COP) to mandatory ones (CORSIA).

The fourth dimension of the norm of carbon pricing relates to the distinction between carbon taxes and emissions trading that reduce emissions within a defined jurisdiction on the one hand, and offsetting on the other hand, which enables the purchasing of carbon credits (or ‘offsets’) from entities in other jurisdictions, for example as in the CDM. Whereas both taxational emissions trading and monetary offsets are referred to as constituting carbon markets due to their shared focus on operating through the trading of emissions allowances, they differ regarding this key distinction of jurisdictions.

Thus, none of the institutions have explicitly endorsed offsets over within-jurisdiction reductions, or vice versa. In their practices, however, they have generally promoted one or the other. Today, offsets are to a larger degree supported and disseminated by private institutions, rather than by public and hybrid ones. Nevertheless, none of the latter are, as such, opposed to them. Offsets such as the CDM were defined as a key instrument in the global response to climate change by the UNFCCC and the Word Bank institutions in the years between the Kyoto Protocol and the Copenhagen Accord. Importantly however, the focus has increasingly turned to the linking of carbon markets, especially in the context of Article 6 of the Paris Agreement (Kansy Reference Kansy2016).Footnote ²

In summary, while all institutions promote the norm of carbon pricing, there are important differences in how they interpret the norm in practice, creating clusters of private institutions on the one hand, and public and hybrid institutions on the other. These differences were most pronounced regarding the choice between carbon markets and carbon taxes.

6.3.3 Membership

In this section, we will outline the membership of the carbon-pricing and carbon-market institutions. This allows us to map how the institutions differ in terms of coverage of actors that have diverging preferences from the members of another institution, e.g. business and state actors. The carbon-pricing issue area mapped out here consists of thirteen institutions (see Table 6.1), comprising public, private, and hybrid constituencies. While a few of them have existed since the 1990s, most have been established from 2007 onwards. Business and public actors (states, IOs, and sub-national governments) are the main constituents, while civil society organizations are only involved in the CPLC, the C4C, the Gold Standard, and the NCM. With the exception of the WCI (which covers the states and provinces on the West coast of the USA and Canada), all institutions are global in terms of membership and reach. However, their members (especially from business and CSOs) tend to be concentrated in industrialized countries and, to a lesser degree, emerging economies.

One important feature of carbon market institutions is, thus, that several of them are related to, or nested within, wider institutions. For instance, the C4C is nested in the UN Global Compact, which is a UN initiative to motivate businesses to adopt sustainable and socially responsible policies, while the PMR, the NCM, and the CPLC are nested within the World Bank (see also Figure 6.1). Regarding the aviation sector, CORSIA, adopted in 2016, is nested within the public International Civil Aviation Organization (ICAO), whereas IATA_COP is nested within IATA, which is the international trade association for the aviation industry. Institutions that are not couched within wider overarching institutions were often established by other international institutions, e.g. IETA being one of the founders of VCS, and the Gold Standard being founded by the WWF. Thus, some of the relations between the institutions are not only very close, but also hierarchical in nature (Alter and Meunier Reference Alter and Meunier2009).

Figure 6.1 Public, hybrid, and private carbon pricing institutions and their membership relations.

Figure 6.1 depicts some of these connections and also provides a first general overview of the institutions’ governance functions, which will be discussed in further detail in Section 6.4. The figure pictures the membership relations whilst being organized under the categories of public, hybrid, and private. Arrows denote that the institution is a member of the institution that the arrow points to. Note that the institutions’ position within the public, hybrid, and private groups, respectively, does not implicate a hierarchy or that they are in other ways more or less ‘public’ or private than other institutions within the same group.

6.3.4 Governance Functions

Mapping out the membership and governance functions of the thirteen institutions shows that they differ to some degree in their focus on various carbon-market activities, but that there are also considerable geographical and functional overlaps. In this section, we therefore identify and discuss two major clusters within the issue area; one centred around the public and hybrid institutions embedded in the World Bank, and another consisting of private institutions, mainly centred around IETA (see Figure 6.1). In order to illustrate our chosen approach to clustering the institutions, we later zoom in on two sets of public and hybrid institutions, namely the UNFCCC and the World Bank institutions, as we find them more politically and academically relevant than the private institutions (Section 6.4).

The private institutions have been instrumental in promoting emissions trading globally and in different polities around the world (Meckling Reference Meckling2011b; Paterson Reference Paterson2012; Paterson et al. Reference Paterson and Hoffmann2014). Their key objective is to further carbon markets, which offers companies (including financial companies) useful business opportunities in the growing carbon-market sector. At the same time, they give emitting industries the possibility to continue their activities without costly carbon taxes and regulation (Paterson Reference Paterson2012). The Gold Standard’s efforts to ensure and improve the environmental and social integrity of offsets stands out in this respect, due to its clear and comprehensive focus on supporting social aspects of sustainable development.

In terms of governance functions, the private institutions focus on providing a venue for information and networking (IETA), on setting standards and commitments for offsets (VCS, Gold Standard), and on advancing company carbon neutrality (CNP). In order to facilitate successful and validated greenhouse gas emissions trading, actors such as CNP and VCS offer businesses, organizations, and technical partners a global standard framework for achieving carbon neutrality through internal mitigation measures (e.g. energy efficiency) and emission offsetting.

The goal of most of these private institutions is to achieve carbon neutral economic growth. For example, IATA_COP, a leading carbon offset programme for the aviation industry, endorses voluntary offset schemes in which passengers pay to offset the emissions caused by their individual share of the flight’s emissions (IATA 2009). Investing in such voluntary efforts to combat climate change with a focus on the individual customers allows businesses to address the CO_2-emissions impact of their industry without having to suppress the demand for air travel, and diminishes the call for mandatory and public regulation.

The governance functions of public institutions mainly regard the provision of information and networking possibilities between carbon-pricing actors, particularly from countries that have, or are considering to, implement carbon-pricing policies. The UNFCCC and CORSIA also engage in setting standards and commitments (both described subsequently). Of the public institutions, CORSIA and the WCI engage in operational activities, while the PMR provides financing for polities interested in adopting carbon-pricing policies. The aim of these undertakings is generally to offer platforms for collaboration to achieve decarbonization of specific sectors, countries, or states within federal systems. The goal of ICAP, for instance, is to provide a platform to strengthen the compatibility and effectiveness of the regulated carbon-trading market in order to promote innovation and allow for ambitious global reductions of global warming emissions. The objective of public institutions such as ICAP, the PMR, and the WCI is thus to provide a platform to strengthen the compatibility and effectiveness of carbon pricing. Following dissatisfaction with the private, voluntary efforts to curb aviation emissions, public and mandatory regulations to reach carbon neutrality were introduced with the establishment of CORSIA in 2016.

In public institutions, both carbon markets and taxes are promoted, albeit with a stronger emphasis on promoting carbon markets. Important in this respect is the objective of creating a global carbon market or at least to link the different carbon markets. Such linking is believed to improve economic efficiency by ensuring uniform prices and thus avoid distorting competitiveness and utilize low-cost abatement options (Kansy Reference Kansy2016). For instance, PMR-led programmes provide countries with grant funding to support the implementation of carbon taxes or emissions trading and include programmes for technical and policy work. The most recently established institution, CORSIA, has been created by the public aviation institution ICAO to ensure the offsetting of emissions above a given level; here relating to the total emissions of global aviation in 2020. CORSIA is voluntary until 2027, after which participation becomes mandatory for all countries except for those with a very low share of global aviation or those that are most vulnerable to climate change due to poverty and other structural inequalities.

Hybrid institutions perform governance actions and services that largely seek to bridge the gap between the public regulatory and the private voluntary markets to achieve broader and globally applicable schemes. The NCM, for instance, aims to support various actors from civil society, governments, and the private sector to link voluntary and mandatory carbon markets. Their goal is thus to facilitate cross-border trade and link carbon markets through improving the transparency and comparability of the existing markets (NCM 2017). The CPLC, too, offers voluntary partnership for leaders across governments, the private business sector, and civil society who share the long-term goal of achieving a global carbon-pricing economy.

The major governance functions of hybrid institutions include information-sharing, networking, capacity building, and knowledge-sharing, which are viewed as necessary instruments to connect strong institutions and regulations with the workings of the market economy. The CPLC and the C4C, for example, view carbon pricing as an essential step to approach zero net emissions, and both institutions see their core role in forming coalitions to approach a global carbon-pricing economy.

The institutions we studied are, with the exception of the WRI, all global in scope. Apart from CORSIA and IATA_COP, which focus on aviation, none of these institutions have specific sectoral foci, but focus on mitigation in general. De facto, this implies that the institutions address emissions from energy use to a significant degree, since virtually all carbon-pricing measures address energy use while not many of them cover emissions from other sources.

When summing up the just-presented mapping of institutional governance functions, it can be said that although all thirteen institutions work toward mitigating climate change by placing a price on carbon emissions, they do differ in regard to which activities they support. Broadly speaking, the public and hybrid institutions mainly focus on the support of political decisions to implement carbon pricing (e.g. CPLC, PMR) and to link mandatory carbon markets (e.g. ICAP, NCM), whereas the private institutions tend to focus on the facilitation of the trading of emissions allowances between private entities (e.g. IETA, see subsequent discussion). Among the private institutions we examined, both the Gold Standard and VCS aim to improve the social and environmental integrity of offsets. IETAFootnote ³ is an association for companies within the carbon-market sector that works for a functional international framework for carbon trading, whereas IATA_COP offers voluntary offsets for air travel.

6.3.5 Summary: Coherence at the Meso Level

When assessing the overall consistency of the thirteen carbon-pricing institutions, one needs to consider that there is no clear division of labour, as their functions and activities overlap to a large degree. Not only do most of them cover the same global geographical scope and the same policy sectors (although CORSIA and IATA_COP focus on international aviation), but they often also perform similar governance functions with similar objectives. It can thus generally be said that the institutional carbon-pricing complex is characterized by a medium level of consistency with some duplication and coexistence.

Regarding the application of the core norm, one can observe medium consistency, with several of the private institutions promoting voluntary carbon markets and offsets, while public institutions promote mandatory carbon pricing in the shape of taxes as well as carbon markets. Yet, these differences in application do not inherently involve conflict. In terms of membership, we also see a medium degree of consistency, with considerable overlap between the memberships of the different institutions – and without any organizing principles except for institutions being respectively public, hybrid, and private.

Finally, concerning governance functions, there are considerable overlaps in terms of undertaking similar functions (especially Information and Networking, see Table 6.1) on a global level, but also a divergence that ensured that most governance functions were covered. In many cases, public, private, and hybrid institutions are performing similar governance functions to achieve similar or related objectives. For instance, ICAP (public), the NCM (hybrid), and IETA (private) all work to promote the linking of carbon markets by providing information and networking opportunities. They thus overlap in terms of what they do (governance functions and carbon markets) but represent different members with potentially diverging preferences, e.g. IETA representing the interests of the carbon-market sector and ICAP those of the polities with emissions-trading policies.

This notwithstanding, our interviews show that collaboration is more common than competition. The widespread information and networking activities (e.g. conferences and workshops) provide ample opportunities for maintaining informal personal contacts.Footnote ⁴ Furthermore, sometimes institutional interlinkages are formalized in terms of Memoranda of Understanding or other written agreements between institutions, such as the Memorandum of Understanding between the IATA_COP and IETA. Importantly, formal relationships also exist in terms of institutions being members of each other (e.g. the WCI being a member of ICAP) or through participating in meetings of major institutions (e.g. of the UNFCCC). The World Bank institutions also often act as central hubs for interlinkages since they can draw on the expertise of the different World Bank departments.Footnote ⁵

While the large amount of institutions may indicate possible competition, especially when new initiatives enter the field, our analysis shows that the here-mapped institutions often seek to avoid this by informal communication and networking, e.g. on the individual level.Footnote ⁶ Through bilateral or multilateral exchange, policy makers engage in technical dialogue on the operation of their carbon markets and opportunities for deepening and connecting those markets.Footnote ⁷ Hence, situations that could potentially lead to conflict have been defused through behavioural mechanisms of ad-hoc coordination. Furthermore, the institutions often collaborate on operational activities, e.g. the implementation of offset projects, and institutionalized benchmarking, for instance in making sure that CORSIA will only use credits that followed the standards of VCS or other institutions.Footnote ⁸

However, the most predominant mechanism for collaboration includes knowledge production and leadership to drive ambition. Key activities include organizing workshops for stakeholders and co-developing guidance materials to mainstream climate-leadership practices. All collaborations are multi-stakeholder in nature, involving companies large and small as well as civil society and public institutions.Footnote ⁹ Often such collaboration is based on complementarity, e.g. the diverse areas of expertise that the institutions exhibit.Footnote ¹⁰ It equally builds on their diverse membership circles, inasmuch as private institutions often collaborate with public and hybrid institutions.Footnote ¹¹ Such divisions of labour are generally not based on official agreements as much as on informal assessments of relative strengths.Footnote ¹²

Altogether, the field is characterized by some duplication but also bilateral (sometimes ad-hoc) coordination. Arguably, had the institutions differed more on the core norm, e.g. if not all of them were in favour of carbon markets, coordination could not have played the same role. The conducted interviews indicate that the level of coherence can be explained due to informal contacts and a desire to avoid overlaps, rather than the institutions being synergetic by design.

6.4.1 Institutions under Scrutiny

We argue that the UNFCCC and the World Bank–embedded institutions constitute the most politically important institutions within the subfield of carbon pricing, and two incumbent nodal institutions of the climate-energy nexus as a whole. Apart from their empirical importance, their crucial differences also give them high theoretical relevance. The UNFCCC is an intergovernmental environmental institution based on a multilateral environmental agreement, which serves as the forum for further intergovernmental negotiations concerning how to address climate change on the global level. The World Bank, on the other hand, is an economic institution, more specifically a multilateral development bank, focusing on poverty eradication and building shared prosperity in developing countries (Nielson and Tierney Reference Nielson and Tierney2005; Park Reference Park2005). These thematic differences notwithstanding, both the UNFCCC and the World Bank, together with their secretariats and embedded institutions, share certain characteristics, such as their global membership reach and their public or hybrid (the CPLC and the NCM) constituencies.

Not unlike the way in which the UNFCCC Secretariat supports the UN climate regime, the World Bank provides secretariat services to the PMR, the NCM, and the CPLC. These services are managed by the World Bank’s climate change group, sometimes with the same person working for more than one institution. We refer to this form of relationship as embeddedness within the World Bank, although the associated institutions differ in their nature, with the CPLC being a coalition, the PMR a trust fund, and the NCM a World Bank initiative. Physically located at the World Bank headquarters in Washington, DC, the three World Bank institutions differ in their roles. The CPLC is a coalition of actors from business, civil society, and politics with the purpose of advocating carbon pricing and, increasingly, promoting carbon pricing among businesses. The PMR is a World Bank Group multi-donor trust fund that provides technical advice and funding to the (at the time of writing) nineteen developing countries that are interested in developing carbon-pricing policies. None of these countries are low-income countries. The trust fund also seeks to create and share knowledge about carbon pricing.Footnote ¹³ The members of the PMR are state governments, usually represented by UNFCCC negotiators. The World Bank is also the trustee and the delivery partner of the PMR. Finally, the NCM supports the linking of climate markets through ensuring that the tradeable units from the different markets are comparable and fungible (that their units are interchangeable).

The UNFCCC has historically addressed carbon pricing in the context of the Kyoto Protocol’s flexibility mechanisms, namely the CDM, Joint Implementation, and emissions trading between industrialized countries. After 2015, the focus has changed from the flexible mechanisms of the Kyoto Protocol to the specific operationalization of Article 6 of the Paris Agreement (UNFCCC 2015), which includes the linking of emissions-trading systems and offsets as well as non-market approaches. Within the UNFCCC as an institution, the international bureaucracy of the UNFCCC SecretariatFootnote ¹⁴ supports the negotiations and other activities of the UN climate regime, especially by providing information, arranging meetings, and drafting proposals (Busch Reference Busch, Biermann and Siebenhüner2009). Like other environmental regime secretariats, it performs key regime functions and has agency in its own right (Jinnah Reference Jinnah2014, ch. 2). This said, the UNFCCC Secretariat has limited autonomy in its mandate and resources compared to the World Bank. The Secretariat is included in this analysis because of its important carbon-pricing activities, which can be divided into: (1) the support of negotiations specifying the contents of Article 6; (2) supporting the operation of clean development mechanisms; and (3) the supporting of countries that adopt carbon pricing to meet their Nationally Determined Contributions by providing technical advice, etc.Footnote ¹⁵

Regarding the core norm of carbon pricing, the World Bank institutions are as such not permitted to promote official opinions about how carbon ideally should be priced, but they nonetheless have considerable autonomy from their member states (Nielson and Tierney Reference Nielson and Tierney2005). The UNFCCC’s position on carbon pricing reflects a compromise between its member states. Even more restricted than the World Bank institutions, the UNFCCC Secretariat is not permitted to hold an official position on how carbon ideally should be priced. Nonetheless, it is possible to identify how the UNFCCC Secretariat and the three World Bank institutions have addressed and framed carbon pricing in their day-to-day practices and, in this way, interpreted key aspects of the norm.

The World Bank as well as the institutions embedded within it have since 2014 stressed the importance of pricing carbon and, except for the NCM, have emphasized carbon taxes, emissions trading, and, to a lesser degree, offsets. The current framing aims to internalize the ‘external costs of carbon emissions … and tie them to their sources through a price on carbon’ and to ‘shift the burden for the damage back to those who are responsible for it and who can reduce it. … In this way, the overall environmental goal is achieved in the most flexible and least-cost way to society’ (World Bank 2018a). This framing and the bracketing of carbon taxes with carbon markets is a recent development. Prior to 2014, the World Bank focused on carbon markets and paid little attention to carbon taxes. Tellingly, the World Bank’s influential annual report, which since 2014 has been named ‘The State and Trends of Carbon Pricing’, was from the initial publication in 2003 and until 2012 named ‘The State and Trends of the Carbon Market’ (no report was published in 2013).Footnote ¹⁶ This change is also visible in the content of the reports, with the pre-2014 reports focusing on the functioning of the carbon markets around the globe and their total volume measured in tonnes of CO_2-equivalents and US dollars, rather than carbon pricing as an instrument to address the externality of climate change or shift the burden (World Bank 2012). Thus, the focus was put on creating functioning markets and linking them rather than pricing emissions and ensuring that those responsible pay for them. This position is close to that of other carbon-market institutions such as IETA. Finally, whereas the PMR (founded in 2010) and the NCM (founded in 2013) contain the word ‘market’ in their names, the CPLC (founded in 2014) focuses on carbon pricing.

The UNFCCC also changed focus, from initially concentrating on the Kyoto Protocol mechanisms to now targeting the mechanisms under Article 6 of the Paris Agreement as well as promoting carbon pricing as a policy instrument. This change was driven by the UNFCCC negotiation process that culminated in the Paris Agreement. The UN climate regime did not adopt specific positions on what domestic carbon pricing should look like, including whether polluters should pay for all of their emissions. Instead, it implicitly emphasized and facilitated particular practices, including a new offset mechanism, the Sustainable Development Mechanism, under the Paris Agreement, which focuses on sustainable development in a broader sense, rather than just mitigation. The UNFCCC Secretariat considered carbon pricing a key policy instrument, without defining it as a stand-alone instrument but rather as one among many.Footnote ¹⁷ Importantly, the Secretariat views carbon pricing as a tool to shift investment from carbon-intensive to sustainable means of production and to promote the deployment of the low-carbon technologies required for meeting the 2 or 1.5 degree target.Footnote ¹⁸

6.4.2 Interlinkages

In terms of governance functions, all four institutions (UNFCCC, CPLC, PMR, and NCM) focus on sharing and creating new information as well as networking, while the PMR also engages in the provision of financing. These governance functions do not have the same inherent potential for conflict between the institutions as standard setting (see Chapter 2).

Regarding the core norm, the World Bank and its carbon-pricing institutions have tended to focus on first carbon markets and then carbon pricing as the crucial step in fighting climate change: once implemented, there is little reason to intervene politically in the subsequent causal chain leading to lower emissions. Nonetheless, there is also significant convergence between the UNFCCC and the World Bank institutions: they all place a strong emphasis on creating a functioning global carbon market, but in the interviews they did not take a stance on whether all emissions should be priced or if grandfathering was acceptable. Importantly, the World Bank has operated within the structures established by the UNFCCC (JI/CDM; NDCs; Article 6), but the main change in the perspective of the World Bank institutions (from a focus on carbon markets toward carbon pricing) did not originate in the UNFCCC. Likewise, all four institutions have promoted offsets as well as carbon pricing within given jurisdictions in various ways. The UNFCCC, the PMR, and the NCM all focus on mandatory carbon pricing, whereas the CPLC also has promoted voluntary carbon pricing within businesses.

A more important dividing line is the different confidence in the ability of the market. The World Bank institutions have been agnostic about how carbon pricing would lead to reduced emissions and framed the fact that carbon pricing leaves the decisions of how to mitigate to the market as a key strength. This neoclassical approach is based on the notion of the market as making the optimal choices. By contrast, the UNFCCC’s approach to carbon pricing leaves considerable discretion to the states in the context of their Nationally Determined Contributions (NDCs) and only operates with carbon pricing as one instrument among many. Although the Paris Agreement and subsequent activities in the context of the Agreement’s Article 6 endorse offset mechanisms and the linking of carbon markets, they very much leave any action up to the Parties and avoid talking about introducing a carbon price (Marcu Reference Marcu2016). The difference can be explained by the considerable autonomy of the World Bank institutions from their member states – compared to the UNFCCC set-up, in which states are involved in the decision-making process and can individually veto proposals.

6.4.3 Mechanisms

The UNFCCC and World Bank institutions interact in a range of different ways. First, and unlike for the subfield of carbon pricing in general, normative interlinkages play a major role. A sequence of rules from the UN climate regime, from the Kyoto Protocol to the 2015 Paris Agreement, have shaped much of the action of the World Bank institutions. The PMR is working with several countries to develop carbon-pricing policies that will help them achieving their NDCs. The NCM seeks to develop tools for linking of carbon markets that can be relevant under Article 6. Prior to the Paris Agreement, the Kyoto Protocol provided a similar context for the World Bank, which was key in developing JI/CDM – inter alia through its Prototype Carbon Fund and through its support for capacity building in countries seeking to host JI/CDM projects (Lazarowicz Reference Lazarowicz2009; Lederer Reference Lederer2012). The World Bank institutions also promoted domestic carbon markets to help countries meet their targets under the Kyoto Protocol – and currently they (especially the PMR and the CPLC) promote carbon pricing as an instrument for countries to meet their NDC commitments.

Second, the World Bank institutions and the UNFCCC engage in behavioural interlinkages, especially through interlocking memberships. The UNFCCC Secretariat is an observer to the PMR and the CPLC, the same way that the World Bank is an observer to the UNFCCC. Importantly, several of the officials representing national governments within the PMR are also UNFCCC negotiators working on Article 6 within these negotiations.Footnote ¹⁹ Furthermore, The CPLC was launched at COP21 in Paris.

Third, the behavioural interlinkages often provided the basis for cognitive interlinkages, especially in terms of exchanging information and knowledge. The UNFCCC has especially collaborated with the PMR, both regarding turning the provisions of Article 6 into more concrete guidelines and providing support for countries adopting carbon pricing in the context of their NDCs.