Delegation and accountability in the clean development mechanism: the new authority of non-state actors.

• Author: Green, Jessica F.

Introduction

It is fashionable these days to speak of the rise of public-private partnerships; surprisingly, however, there is relatively little scholarship on the interaction between states and private actors at the supranational level. This paper offers an in-depth case study of the Clean Development Mechanism (CDM)--one of the three market mechanisms of the Kyoto Protocol--which features a prominent role for non-state actors. Drawing from the principal-agent literature, this paper analyses the mechanics of the complex--and increasingly fragmented-institutional arrangements of the CDM, and draws some conclusions about the functioning of the mechanisms created to ensure the accountability of private agents.

The CDM provides incentives for reducing greenhouse gas emissions by allowing developed countries to purchase emissions credits for abatement activities undertaken in developing countries, and to apply these credits against their overall targets. Since all developed countries that are party to the Protocol (1) have committed to meeting specific reductions by the end of 2012, the CDM allows them to do so in what is, theoretically, the most cost-efficient manner--by purchasing emissions reductions where they are most cheaply produced, i.e. in the developing world.

The CDM has delegated considerable authority to private actors. The complexities of creating and regulating a new market in greenhouse gas (GHG) emissions have prompted the creation of a number of subsidiary bodies. In turn these bodies have been delegated authority to create and implement rules, help resolve disputes, monitor and verify participants' behaviour and award emissions reductions credits. These subsidiary bodies use private actors both as consultants and as agents to carry out specific measuring and monitoring tasks.

To evaluate how well the principal--in this study, the Executive Board of the CDM--is able to control the agents--the "Designated Operational Entities"--I conducted an analysis of 752 projects submitted to the Executive Board between December 2004 and June 2007. The results are of this analysis are mixed. Although many of the oversight procedures in place appear to be functioning well, there are some fundamental structural issues that may contribute to agents acting in rent-seeking ways, to the detriment of the principals. Specifically, the small number of firms qualified to carry out monitoring and verification raises concerns of monopoly and collusion. Moreover, the pace of accrediting new private agents is proceeding very slowly. There are considerable barriers to entry, including the knowledge and expertise that potential agents must first acquire, as well as the lengthy process to become an accredited Designated Operational Entity (DOE). Finally, there is little evidence that the "police patrol" oversight mechanisms are functioning well. In sum, the data indicate that though the CDM was designed in a way to maximize the Executive Board's control over the Designated Operational Entities, in practice, we cannot be assured that these private agents are not pursuing their own goals, at the cost of those delegated to them.

Given the vast literature on international organizations, why look at a small subsidiary body such as the CDM? There are two answers which explain the significance of this case study. First, although there is talk of the "death" of the Kyoto Protocol, the CDM is thriving--and growing exponentially. As of July 1, 2008, the CDM had granted over 160 million credits or "certified emissions reductions" (CERs) through more than 1100 projects. (2) Currently, there are approximately 3000 additional projects in the pipeline, estimated to represent over 2.7 billion CERs. (3) One CER is equivalent to one metric ton of carbon dioxide (or the equivalent amount of other greenhouse gases). The price of CERs has fluctuated, but ranges between 13 [euro] and 16 [euro] per metric ton of carbon dioxide. (4)

Second, and more importantly, the CDM, along with the two other "flexibility mechanisms" in Kyoto, are emerging as the backbone of a larger emissions trading scheme. (5) It is very likely that the intergovernmental arrangement that follows Kyoto (which is set to expire in 2012) will include provisions for emissions trading. Moreover, the CDM is no longer the only emissions trading initiative. A number of national and sub-national emissions trading initiatives have emerged around the globe--many of which are taking their cues from Kyoto's flexibility mechanisms. They are using many of the same methodologies, oversight structures and importantly, many of the same private firms for monitoring and verification activities as the CDM. Thus, the CDM can be viewed as a significant anchor in a larger emerging market in carbon dioxide emissions. If this market continues to grow and to delegate key regulatory tasks to private firms, it is then important to look carefully at the institutional mechanisms in place to constrain them.

This paper seeks to describe and analyze the principal-agent relationship in the CDM. It is not meant to offer definitive conclusions about the nature of private agents in global regulatory institutions; indeed, without examining the variation across institutions, any conclusions would be misleading. Moreover, the paper does not seek to explain the specific reasons that motivated the Parties to delegate certain functions within the treaty. The question of which functions states choose to delegate (and to whom) is an important one, but it will not be directly addressed here. Finally, given that the delegation patterns in emissions trading are likely to persist, I take the structure of the institution as given, and examine the extent to which there is deviation between the expectations of the principals and the activities of the agents.

The paper is structured as follows. In the first section, I situate my research within the relevant literatures in law and political science and discuss links between them. Second, the paper defines delegation and the principal-agent framework used in the analysis. Third, it turns to an in-depth examination of the structure and functions of the CDM. Fourth, I discuss the accountability mechanisms in place in the CDM. In this section, I also examine trends in the behaviour of some of the private agents involved in the CDM. I show the extent to which principals and agents differ in their assessments of projects' conformity to the rules of the regime. The final section draws some general conclusions about the accountability of private agents in the CDM.

1. Relevant literatures

   In this section I outline how this investigation fits into current discussions in the political science and legal literatures. By focusing on the act of delegation, this paper aims to bring together debates in the delegation and global administrative law literatures, emphasizing their similarities and the potential contributions of each analytical frame to the other.

   Derived from economics, delegation theory has only recently been used to explain the principal-agent relationship between states and international organizations. (6) In economic theory, the primary challenge of economic organization is "to explain the conditions that determine whether the gains from specialization and cooperative production can be better obtained within an organization like the firm, or across markets." (7) This calculus is often referred to as the "make or buy" question. However, this decision is complicated by what Alchian and Demsetz refer to as the "metering problem" in team production: it is difficult to measure the individual inputs to a given output and distribute rewards accordingly. (8) Without accurate metering, rewards will not correspond appropriately to effort, and an incentive to shirk emerges: to exercise less effort with the hope that this behaviour will go undetected and the reward will be the same to all agents irrespective of level of input. Of course, firms can make greater efforts to monitor behaviour, but this is not without cost. Thus, there is a general tendency for agents to "shirk", pursuing their own interests at the expense of the principal. The massive body of work spawned by this fundamental problem had the following "punch line," according to Epstein and O'Halloran: "principals can usually mitigate conflicts of interest [between principal and agent] through the careful design of incentive contracts but can rarely control agents perfectly." (9)

   Political scientists have borrowed the principal-agent paradigm to examine relations between branches of government. (10) Yet it has only recently been used in analyses of international politics. However, within the realm of international politics, there is little work extending it to private actors. Thus, this examination of the CDM presents an opportunity to use current theories of delegation on a new population to see how principal-agent theory applies when agents are non-state actors.

   To date, studies of international politics offer similar explanations of delegation: States delegate to reduce transaction costs and solve problems that allow mutually beneficial cooperation. Specifically, "principals decide to delegate powers to an agent ... because that agent will reduce the transaction costs of policymaking either by producing expert information for the principals or by allowing the principals to commit themselves credibly to their agreed course of action." (11) Recent work by Hawkins et. al. reiterates and expands upon this point: the authors explain five mechanisms through which delegation can confer benefits to agents by lowering the costs of cooperation. Delegation can help: reduce defection; facilitate collective decision-making; resolve disputes; enhance credibility through enforcement; and "lock in" certain practices. (12) A variant of the efficiency rationale is presented in the literature on public-private partnerships. Streck...