Collaborative Reseach: Creating Carbon Markets in Brazil and India: A Comparative Study of Firm Environmental Investment Decisions Under the Clean Development Mechanism

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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.