It is very common in the risk management literature to describe risks as complex, ambiguous, and uncertain in order to differentiate them epistemologically (Brugnach & Ingram, 2012; Cabantous, 2007; Ericson & Doyle, 2004; Ilin & Varga, 2015; Johansen & Rausand, 2015; Knight, 1921; Müller-Mahn et al., 2018; Perrow, 1986, 1972). In short, the three characteristics of risk can be distinguished as follows (see also Rosa et al., 2014): *Complexity* characterizes a condition where it is diffcult to identify and quantify exactly the potential causal relationships between aspects of risk and possible adverse effects of decision making on risk. *Ambiguity* corresponds to the phenomenon that various actors know risk differently, resulting in a

variability of legitimate risk interpretations with respect to observations and evaluations of identical data. *Uncertainty* refers to unknown knowledge about certain causal relationships. That includes not knowing what one does not know.

One way of dealing with these challenges is through regulation. Standards and norms help actors reduce complexity, clarify ambiguities, and improve the reliability of mutual expectations (North, 1990). In Chile, for example, in 2015 the National Institute for Standardization published the norm NCh3380 that aimed at uniformly measuring wildfre risks (INN, 2015). The norm establishes a terminology and classifcation of risks of forest fres in plantations, for which it defnes and delimits spatially different levels of risks, based on the evaluation of probabilities of occurrence and the different impacts caused by wildfres. The norm consolidates interdisciplinary knowledge and is considered "[…] applicable to any existing forest plantation in the country, regardless of the species it contains, size, location, among others" (INN, 2015, p. 2). This, however, raises a new challenge. Although the norm covers geographically correlated aspects of risk and makes them comparable, it misleads one to believe that the resulting risk models can be applied uniformly, that is independently of time and space. Such an approach in particular would mask and decontextualize the uncertain and ambiguous circumstances of the risk. Standardized models always entail the challenge of being able to capture evolving or systemic risks (MacKenzie, 2011). Well, what exactly leads to complexity, ambiguity and uncertainty in relation to forest fre risks in Chile and how to deal with it?

#### *Complexity: Multidirectional Correlations Between Physical and Anthropogenic Factors*

It is an obvious choice to start with the Chilean forestry sector with its specifc ways of organizing economic activities in space (Clapp, 1995; Gatica, 2012) to illustrate how complex links between anthropogenic and natural factors of wildfre risks are created. Forestry companies, in frst place, decide the composition of tree species in their forest plantations. They prefer exotic species such as eucalyptus or pine, as these are adapted to dry climatic conditions, grow rapidly, and are therefore economically very proftable.3 However, as both species have a higher water consumption than native trees, they can intensify droughts on a microgeographical scale and fuel the effects of fres (Little, Lara, McPhee, & Urrutia, 2009). At the same time, however, industrial measures of plantation management signifcantly reduce the magnitude of forest fre risk. In their quest for higher yields, forestry companies remove "interfering biomass" from forest plantations and thus control an important fre accelerator. By investing in watchtowers that they strategically place within their territories, they create and maintain an interconnected monitoring system that

3Currently, pines account for 58% of all plantation area in Chile, while eucalyptus represent 36% (CONAF, 2018).

allows for wildfres being detected in time (Tapia & Castillo, 2014). The companies' own fre brigades can quickly reach out to a fre's source through laid forest paths. If the probability of the occurrence of fres remains constant, plantation management measures reduce the damage dimension of risk—although this relationship is not linear. Many risk-increasing and risk-reducing factors cannot be measured simultaneously in an accurate way. This is how complexity is created, and—by the way—a methodological problem for many forecasting risk models (Castillo et al., 2013). Normative assumptions on the weightings of individual factors must be chosen for these models to work.

Table 8.1 summarizes regional forestry activities in Chile and illustrates the complexity of the relationships between physical and anthropogenic factors of wildfre risks. In Chile, the probability of forest fre occurrence should actually decrease in the direction of the southern forest regions, as these are characterized by climatic conditions with lower average temperatures over the course of the year and generally record higher precipitation (Altamirano, Salas, Yaitul, Smith-Ramirez, & Ávila, 2013). A glance at Table 8.1, however, reveals that forest fres in the south occur more frequently in absolute terms and measured in terms of available forest areas than in the northern forestry regions. It is also a fact that in the regions of Bio Bio and Araucanía, forest fres occur much more frequently in plantation forests than in natural forests. Simultaneously, however, plantation fres are signifcantly less destructive than fres that affect native forest.

The search for explanations of these fndings leads to the question of who invests in frefghting in the frst place and who decides which sources of fre are extinguished frst when several fres occur simultaneously. Since frefghting in Chile is largely subject to a market in which private companies offer their services—and in which the economic value of the timber resources often determines the availability of fre brigades—it is understandable that wildfres in Chile provoke critical interpretations of the country's neoliberal forestry model (Barton & Román, 2012; Reyes

**Table 8.1** Forestry activities and forest fres in Chile

*Note.* Personal elaboration with statistical data from CONAF (2018)

& Nelson, 2014). In relation to these interpretations, the ambiguous characteristics of risk come into play.

#### *Ambiguity: The Coexistence of Several Equally Logical Explanations for Forest Fires in Chile*

"Risks only gain infuence in the social world to the extent that they are communicated" (Renn, 2008, p. 57). Therefore, it is through *discursive knowledge* (van Dijk, 2014) that risks are socially constructed. Those who have experienced fames that directly affected their *livelihoods* describe and explain wildfre risks differently than those who only look at them from a distance. Geographical knowledge of complex risk relationships gives profound explanatory substance to these discourses. However, with geographically founded, context-dependent explanations actors can quickly confront the distanced with supposed ambiguity.

In Chile, many different discursive explanations circulate about the origins and the hazardous effectiveness of forest fres. They certainly feed on the heterogeneity of the society's risk knowledge. The ambiguity of risk discourses, on the one hand, refects the perceived threats by different social actors (Mermoz, Kitzberger, & Veblen, 2005), and on the other hand, is due to linguistic diffculties in articulating risk. Those who have experienced risk at frst hand, often describe their experiences in an opportunistic way, for example, to maximize the infuence on distanced political decision makers who they want to win over to their cause (Farré, 2005). This may lead to interpretations related to forest fres that are artifcially exaggerated and intentionally false. Ambiguity can thus be understood as a function of confict over preferences, intersubjectivity of discourse, and uncertainty over the technical aspects of risk communication (Hanson & Kysar, 1999; Johansen & Rausand, 2015). The consequential ambiguity of the discourses does not refer so much to an uncertain future as to the uncertainty related to past and present experiences.

Across all Chilean regions, the main causes of wildfres are accidents and the carelessness of man (58%). However, almost one in three fres is caused by delinquency, in other words, intentionally caused ignitions, while 15% of the causes of fres remain in the dark. It is above all the unknown and intentional causes of wildfres that are reported and speculated on in detail in the Chilean press (Millones, 2017; see also the review of Aylwin, 2017).

Based on the statistics by the Chilean National Forest Cooperation (CONAF, 2018), Table 8.2 reveals a regionally unequal distribution of the causes of the wildfres in Chile—especially related to fres that are intentionally started. This is also strongly refected in the causal explanations one gets when asking experts and affected parties about the background of the arsons in Chile:

1. Some argue that wildfres are caused by forest owners themselves in order to circumvent existing land-planning regulations (Caviedes, 2017). In the proximity of urban areas, for example, landowners speculate that burnt areas may be

**Table 8.2** Causes of forest fres in Chile (Annual average 2003–2016)

*Note*. Personal elaboration with statistical data from CONAF (2018)

designated as urban developing land that awaits construction permits. This is a reality in many parts of the world (Salvati & Ranalli, 2015). In Chile, these causes are only narratively discussed in public, since hasty accusations can have legal consequences.

disparities and political exclusion. Wildfres seem to have become the symbol of their confict with the Chilean state (Montalba-Navarro & Carrasco, 2003; Rojas & Miranda, 2015). It also seems that wildfres are directly targeted against large forestry companies that mark land uses with their tree plantations and dictate the regions' main economic activities (van Holt, Binford, Portier, & Vergara, 2016). As late as after colonization by the Spanish, with the country's nationalization, Southern Chile experienced a capitalist appropriation and valorization of land that created vulnerable people and is still ongoing today (Latorre & Rojas, 2016). Though the accusations are made very quickly, the circumstances of wildfres in the Araucanía region are not at all clear. Some of them turned out to have been caused by the private sector and even by public offcials in order to blame the Mapuches for the crime and thus keep the confict over land usage alive in a discursive manner (Seguel, 2018; Sepúlveda, 2013). In this way, fres serve to justify forest expansion (retrospectively) (González-Hidalgo & Zografos, 2017).

The coexistence of these different discourses confronts political and economic actors with decision-making problems. They obscure the true motives of the actors behind the arsons, which leads to the uncertain characteristics of forest fre risk in Chile. For the insurance sector in particular, arson represents an uncertainty, in other words, risk that is impossible to calculate.

#### *Uncertainty: Hidden Self-Reinforcing Social Amplifcation of Forest Fire Risk*

Unknown and uncertain risks are induced by scientifc uncertainty. While in the case of unknown risks researchers are aware that they do not know enough, for example, to predict the frequency and severity of catastrophic events (Chichilnisky & Heal, 1998), uncertain risks remain hidden from the society's radar for a long time (Beck, 1992; O'Malley, 2004). This is partly due to the fact that the causes of modern risks—but also their effects—are no longer confned to one place. Often there is also no legally identifable entity as the perpetrator of risk. Risk decisions can have a long latency period before they materialize. For political actors, this is the main source of uncertainty: "[I]t is precisely unknown unknowns which provoke far-reaching conficts over the defnition and construction of political rules and responsibilities with the aim of preventing the worst" (Beck, 2006, p. 335).

Researchers also refer to uncertainty in risk to address processes of systemic, self-reinforcing risk amplifcation (Kaufman & Scott, 2003). Uncertain risks are systemic if they trigger unnoticed chain reactions. Accumulated negative externalities can trigger devastating effects. In the following, I will focus on three examples of systemic aspects of uncertainties related to wildfre risk in Chile. They raise awareness of the fact that depending on the local and regional context, the occurrence of a forest fre in Chile can "ignite" subsequent fres and reinforce risk. The frst example is certainly simplifed, but it serves as a textbook example to illustrate

the underlying systemic effect empirically. In the second example I refer once again to the discussion of the ambivalent symbolic attributions of arson that I introduced in the previous chapter. In the third example I summarize a content-analytical interpretation of interview statements from several empirical feld studies in the Maule region conducted between 2015 and 2019.

(Hechavarria, 2018). This is an important frst detail in understanding the regional confict and the subliminal systemic risk of forest fres that accumulates in the Maule region.

Speculation and mutual accusations on the causes of recent wildfres spread in the region: Large forest owners, for example, claim that their smaller neighbors act as *free-riders* in the face of forest fre risk. In other words, "[…] they do not buy insurance and [instead] rely opportunistically on the fact that their forest property is observed and cared for by the large company and their fre brigades" (Interview conducted with the manager of a medium-sized sawmill in San Ramón, March 10, 2016). This expectation would—according to the interviewee—reduce smaller landowners' incentives to actively monitor their plantations. From the point of view of large forest owners, this increases the risk of a forest fre in their neighborhood and therefore "[…] through geographical expansions, the risk of damage to our plantations is uncontrollably increased" (Interview conducted with the operational risk manager of a large forest company in Constitution, March 11, 2016). Implicitly, this deep concern of the large company gives rise to the carelessness of the small neighbors in the frst place.

According to this logic, it is understandable that large forest owners in Chile have incentives to expand their forest ownership over a large area and in a coherent manner: The less mixed the regional mosaic of forest properties, the more controlled the risk will be (Vergara-Díaz, Sandoval-Vásquez, & Herrera-Machuca, 2017). In response to the discourses of the large companies that accuse small landowners of being opportunistic, these, in contrast, accuse the big players of not adequately protecting the property of their neighbors in the event of a forest fre. More precisely, in interviews with medium-sized forest owners in Maule in 2016, large forestry companies were accused of directing fre fronts towards the property of small forest owners to avoid major damage to their own forest plantations. Still others claim that extensively insured forest areas stand in the way of the real efforts of large forestry companies to fght the fames. Of course, it is not possible within the framework of this contribution to resolve the absolute truth behind these testimonies or to confront it with the technical aspects of frefghting. It should be noted, however, that frefghting follows military hierarchical command structures and, depending on the situation, includes the right to subordinate private property, which is otherwise very strongly protected in Chile. At least the narratives presented above give an idea of the subliminal confict between small and large forestry actors in the Maule region. The fear of pyromaniac acts in the region in response to economic repression and exclusion is growing for years (see also the statements of economic actors quoted in Saavedra, 2017).4

4 In more recent interviews with forest owners in the Maule region, implications of the arsonists of the 2017 forest fres were collectively avoided. "We don't want to make any false accusations, and in particular we want to hinder the discourses from Chile's southern forest regions to reach the Maule region. We want to avoid the false interpretation that forest fres have become an inficted result of the forest industry itself," one sawmill owner openly admitted in an interview early in 2019.

Systemic risks are uncertain until they materialize and therefore cannot be calculated ex ante (Ilin & Varga, 2015). To address them, a readjustment of risk perception is needed. In the frst case, this was done, as described, by new frefghting rules that limit the use of actually effective helicopters to specifc areas. In the second case, however, the systemic effect of risk remains out of reach for risk managers in forestry. At best, they have the option of relying on risk-avoidance strategies—that is to distance themselves from the neoliberal model of forestry—, which in this case could mean the end of their business model; and even that does not guarantee that other actors will not continually try to exploit the symbolic effect of forest fres. The interviews quoted for the third case show that regional economic actors at least develop a feeling for the accumulating systemic risk.

As should have become clear from the above, the epistemological challenges of the complexity, ambiguity, and uncertainty of forest fre risk arise from the fact that all three characteristics are closely intertwined and lead to an obscuring of risk relationships. Against this background, it is understandable that risk managers usually aim at simplifying and separating the individual attributes of risk. This enables them to transform ambiguity or uncertainty into complexity that they can then structure and handle by making use of technical risk models (Ericson & Doyle, 2004). In the following chapter, I explain how this works in practice. While it becomes clear that risk management is not the same as risk governance, the chapter reveals the complementary aspects of different management practices and explores their possible uses in explicitly regional risk governance approaches.

#### **The Complementarity of Risk Management Practices**

Advocates of theoretical insights from the New Institutional Economics (Furubotn & Richter, 2005), which are widely applied in fnancial risk management practices, proclaim markets and hierarchies as in a sense ideally opposed governance forms for the coordination of economic interaction. The characteristics of a transaction as well as the degree of asymmetrically distributed information between economic actors determine whether either hierarchical orders through company routines or market-based pricing processes under competitive conditions provide transactioncost-effcient coordination. Interestingly, hierarchical and market-based forms of risk management are not necessarily opposed to each other, but rather mutually supportive. The case of risk-management practices in Chile's forestry sector illustrates that a hierarchically organized risk management even can be the prerequisite for the emergence of and access to insurance market solutions.

To fully understand the complementary logic behind these practices, it is important to note that forestry companies and insurers only slightly differ in their basic approach to risk and uncertainty. Both actors are able and willing to handle risk that they can calculate by themselves, and both reject uncertainty in risk management. Then, however: What can a market for forest fre insurances look like if the preferred and undesirable risks of both players are more or less the same? Of course, it depends on the small differences in dealing with particular characteristics and aspects of risks. Additionally, one has to look at the uncertainty avoidance strategies of both actors to understand the complementary character of Chilean forest fre risk management practices.

For insurance companies, calculated risks undisputedly represent a core business. Insurers are able to diversify them with the help of the *law of large numbers*, which states that the empirical reality (temporal and spatial) of risk can be aggregated into mean values (Chichilnisky & Heal, 1998). Forestry companies take a positive view on risks as well. Correctly managed, risks promise above-average returns and competitiveness advantages (Lundqvist, 2015). In contrast to insurers, however, forestry companies have to fnd ways to handle causes and effects of forest fres individually and in context-specifc ways.

Uncertainty, that is incalculable risk, is something that neither actor is looking for. Forestry companies and insurers alike are trying to externalize or completely avoid risks that are rare (and at the same time very destructive), highly specifc, and uncertain. Large forestry companies in particular, as I showed in the previous chapter with the example of systemic forest fre risks in Maule, are afraid of risks that "are taken" independently and opportunistically by others and that "endanger" the success of their own businesses in the sense of a negative externality (Luhmann, 1991/1993). Insurance companies, in turn, do everything to avoid moral hazard behavior of their clients, which can even lead to the situation that there is no market supply for insurances at all (Hellwig, 1983; Stiglitz, 1983). This line of argumentation fts with the transaction-cost approach, whose advocates stipulate purely hierarchical control for dealing with uncertain risks (see also Knight, 1921). How does the insurance market emerge when market participants share a common desire to waive or avoid uncertainty? The answer has to do with diverse risk management practices of standardization and categorization of risk in order to reduce its complexity, ambiguity, and uncertainty characteristics.

#### *Risk Management in Chilean Forestry*

In Chile's industrialized forestry sector, forest plantations are managed in a way that minimizes both the likelihood of a forest fre and the possibility of uncontrolled expansion. The homogenization of contextual conditions, the simplifcation of risk relationships, and the decoupling of certain risk elements go hand in hand and infuence each other reciprocally: (i) The simplifcation of risk begins with the focus on certain causes of forest fres. In particular, the main cause of accidents can be minimized through employee training and clear routine instructions. Routines are instrumental for the implementation of plantation management practices that aim at creating industrial economies of scale. Only a few specialists are needed to monitor the compliance of the routines. (ii) The decoupling of forest fres' causes and effects is achieved through targeted infrastructure investments, such as the formation of frebreaks that slow down or stop fres that have broken out. Often, frebreaks are

strategically created in the course of regular clear cuts. In this case, plantation management practices and infrastructure investments coincide. Furthermore, forest roads are a strategic investment that serves risk management purposes as they allow fre brigades quick access. (iii) Finally, the homogenization of the physical space complements the decoupling and simplifcation of risk relationships. The large forestry companies in Chile aim at a consolidated and coherent forest property. Over the past 40 years, they have achieved this largely through continuous acquisitions and forestation of tree plantations. Only few other private forest properties still separate the plantations of the large companies. Connected forested areas lead to economies of scale in forestry logistics. They can also be better monitored with fre protection watchtowers, which in turn further contribute to the decoupling of risks as fres can be quickly detected once they have broken out.

All these plantation management practices are based on combining centralized and decentralized risk management logics. In addition, multiple spatial references are evident: Complexity reduction via routines, for example, is planned and coordinated hierarchically top-down from the companies' headquarters (see also Perrow, 1986). The site-specifc implementation and monitoring of the routines, however, takes place in decentralized way. The watchtowers in the forest regions are an important node in the risk communication network. In case of a forest fre, their occupants communicate to neighboring units and the company headquarters alike so that responses can strategically be elaborated in a timely manner. In the event of a wildfre, military-like chains of command are activated and take control. Firefghters are coordinated centrally but can decide locally in order to be able to react quickly to changing conditions (Arnaldos, Navalón, Pastor, Planas, & Zárate, 2004). With this combination of centralized and decentralized risk-management routines, actors in forestry enterprises are in a good position to react to ambiguous risk signals from forest regions and actively shape local practices of handling risk. However, through locally adapted action, they are also coresponsible for creating ambiguity in the interpretation of wildfre risks in Chile on a national scale.

#### *Risk Management in Insurance Companies*

Insurance companies implement risk management practices that rely on standardization and categorization based on quantifcation and mathematical procedures (Dean et al., 2003; Jarzabkowski, Bednarek, & Spee, 2015). Since quantifcation disconnects existing data from local narratives or general stories that stabilized the meaning of risk in the frst place (Müller-Mahn et al., 2018), insurance companies must create their own meanings of risk. Prices in insurance markets, for example, are such a standard for risk quantifcation that also provides meaning for economic operations (Hayek, 1945; Kessler, 2015). Prices communicate the magnitude of the risk to third parties such as policyholders. Risk maps provide a similar communication frame (Dransch, Rotzoll, & Poser, 2010). Maps not only can be used to locate the origins of historical forest fres events and illustrate their propagation in space. Loss statistics incorporated into the maps also provide insurers with a spatial overview of the risk's frequency and extent. Risk maps, therefore, serve marketing purposes. Insurance companies use them to signal to their clients why insurance policies in so-called high-risk areas contain a high insurance premium. Risk maps give meaning to prices. This kind of risk communication, however, frst requires a sophisticated valuation process (Aspers, 2009). Risk valuation applied in insurance companies' risk management practices is mainly based on mathematical models and correlation logics. Actors using these models are able to capture the complexity of individual aspects and conditions that cause or amplify forest fres and break them down into their individual components by means of multiple (and even spatial) regressions (Castro & Chuvieco, 1998). Spatially differentiated risk models allow insurers to simulate their values at risk.

The better the insurance company manages to break down the complexity of wildfres into modeled chains of linear causes and effects, the better it can design and offer different kinds of insurance contracts. On the one hand, insurance companies are always free to decide whether and where to offer an insurance policy to a customer. This means that they can exclude areas in which forest fres occur very frequently and for unknown reasons from accessing insurance. The market is simply rationed geographically (Hellwig, 1983). On the other hand, insurance companies have a strong contract design tool at their disposal: *self-selection* (Furubotn & Richter, 2005). By offering customers alternative contract designs that differ, for example, in the amount of the deductible in the event of a loss, insurers obtain detailed information about a customer's risk exposure. By accepting certain contracts and rejecting others, the insured reveals his risk attitude and self-assesses his exposure to risk. Self-selection is part of a bilateral negotiation process. In negotiations, the customers themselves offer to fulfll certain conditions in order to lower the prices for insurance. For example, the better the forestry company itself controls the risk through simplifcation, homogenization and decoupling its effects, the cheaper the insurance premium offered.

#### *Mutually Complementary Risk Management Practices and Risk Avoidance Strategies*

The hierarchical and market-oriented risk management practices of forestry companies and the Chilean insurance sector complement each other at least in two ways: On the one hand, this can be seen from the fact that forestry management practices stimulate innovation in insurers' services. Without economies of scale from industrialized plantation management, the market for forest fre insurance in Chile would have been too small, too transaction-intensive, and possibly nonexistent (see also Chichilnisky & Heal, 1998).5 On the other hand, complementarity most obviously arises from how insurers infuence the forestry management standards of forestry companies through self-selection and contract design. Insurers make it clear how important it is for them that hierarchically supervised forestry workers regularly thin out the plantations (= simplifcation of risk correlations), that the insured plantations comprise a minimum size (= homogenization of risk), and that watchtowers and frebreaks cover areas at risk (= decoupling of risk correlations). These requirements are either specifed directly in the insurance contracts, or the forestry companies are indirectly given incentives to fulfll them through promised premium discounts.

Self-reinforcing effects of hierarchical and market forms of risk management also derive from the uncertainty avoidance strategies of the actors. Forestry companies, for example, want to get rid of the unlikely but in principle possible scenario of a total loss of their assets in the event of a regional wildfre catastrophe. Although they view this total loss scenario as unacceptable, it is also incalculable and therefore incorporates the characteristics of uncertainty. Large forestry companies avoid this uncertainty by transferring it to the insurance sector. They buy insurance policies that include high deductibles. As a result, despite having invested in insurance, the forestry companies will cover many minor losses by themselves. This practice is confrmed by the operational risk manager of a large Chilean forestry company: "Even in the disaster year 2017, the compensation payments of our insurers were below the expenses of the annual insurance premiums. All our contracts included high deductibles" (Personal interview conducted in 2018). The manager claimed that the frm's shareholders explicitly wished to insure only the uncertainty of a total loss.

What forestry companies consider an incalculable and uncertain risk, caused by third parties and therefore understood as an external hazard, is, in the eyes of the insurer, complex and controllable. Insurance companies are able to absorb the uncertainty of a total loss of one of their customers because they can diversify it and convert it into a calculable and statistically low risk of a total loss across all their customers. However, insurers also retain much of their control over risk explicitly through their own uncertainty avoidance strategies: They avoid uncertainty by rationing the market. This strategy is geographically oriented in two ways: On the one hand, as already mentioned, they exclude insurance in municipalities with high potential for political tension, in other words, in territories where arson is a frequent cause of forest fres or where causes are simply unknown. On the other hand, they also exclude specifc forest areas on a small scale that they declare to be uninsurable. In avoiding so called *cluster risks* and *risks of geographical contagion*, insurers deny market access to forest owners located in the immediate geographical proximity of already insured forest property. During a 2016 interview, a Chilean insurance company's sales executive referred to a map on the wall of his offce, on

5This is illustrated, for example, by the fact that there are currently no insurance policies available for economically used natural forests.

which the sites of the currently insured forest areas in his responsibility were marked with fags. These markings gave the sales executive an indication of the surrounding areas where he could (or should) not offer any further forest fre insurance. "I avoid selling here because a single forest fre could otherwise affect several of my customers at the same time," he explained. In a market like Chile, which is characterized by a limited number of insurers (Loewe et al., 2017), this leads to the exclusion of forest owners willing to buy insurances. Rationing fnancial products is typical for oligopolistic insurance markets (Hellwig, 1983). However, for some clients of the insurance companies, exclusion may seem arbitrary. Even when exclusion is based on the principle of *who comes frst*, for many it seems related to an exclusive relationship between the insurers and the large Chilean forestry companies. In some ways, geographically uneven access to insurance in Chile represents a negative externality of insurance-based risk management practice and can be interpreted as the result of the decontextualization of risk and risk knowledge, which I will explain in more detail in the following chapter.

#### **The Decontextualization of Risk and Risk Knowledge**

Risk managers tend to analyze different risks in isolation (MacKenzie, 2011). In more general terms, risk-exposed actors epistemologically grasp and handle the causes and effects of risks as if they were separated from each other (Rosa et al., 2014). Therefore, also conceptually it makes perfect sense to separate the material dimension of potential physical losses from the discursive dimension of how people originally perceive, communicate and socially construct risk. However, in the course of these management and academic practices, the knowledge of risks is easily decontextualized, also in a spatial sense (November, 2008).

Forestry and insurance companies in Chile design and work with economic models for decision making that are considered (and have been proven) to be useful for the handling of risk. In doing so, they clearly decontextualize the risk of forest fres in a spatial sense. Forestry enterprises, for example, decontextualize risk and risk knowledge in the course of their homogenization and standardization strategies in managing forested land. They homogenize space by purchasing adjacent areas, which they then use for reforestation, and they standardize space by anchoring the same risk management routines in their plantations. Actors using routines not only standardize risk knowledge, they also decouple risk from the unit of space, in the course of which plantation forests are transformed into assets that can be valued uniformly and according to economies of scale. A forest area managed as a monoculture decontextualizes specifc site conditions. It ignores the fact that site-adapted, native tree species might be superior to exotic tree species in terms of reducing the local risk of forest fres.

The decontextualization of knowledge related to forest fre risks can also be seen in the fact that large forestry companies even succeed in acquiring insurance for their plantations in politically unstable communities, in other words, in communities in which insurance companies are actually planning a rationing strategy for the market. Large forestry companies generally own and manage forest areas spread over several forest regions in Chile, and because these are homogenized and managed in a standardized and comparable manner, they are able to acquire a package of insurance policies from the insurance companies that covers several separated plantations at once. Forest fre risks in high-risk areas are then contractually offset by risks in less endangered areas. The exact knowledge of the circumstances of the risk in the package becomes blurred and decontextualized. It no longer appears relevant due to the standardized price for the packaged risk.

By purchasing an insurance package with spatially dispersed forest ownership, also the insurer gains several advantages. Not only does a package of insurances enable the application of the law of large numbers; the insurer is also given an opportunity to spread the risks spatially, which reduces his risk of total failure. His accumulated overall risk is no longer determined by the conditions at a given site. This reduces his interest in surveying context-specifc knowledge about the exact causes and effects of individual forest fres. The same is true for a high number of deductibles that policyholders accept in individual insurance contracts. Finally, the decontextualization of risk increases its quantifability, which enables the insurer to translate it into the language of the fnancial markets, which in turn opens up opportunities for the insurer to resell parts of the risk to reinsurance companies.

Despite all these obvious advantages for corporate risk-management practice, the widespread practice of decontextualizing risk and knowledge on forest fre risks in Chile, coupled with reduced incentives to generate new knowledge, for example about the causes and effects of forest fres, can prove to be a step backwards in governing risk from the point of view of a resilient society. Uncertainties and ambiguities require a broadening of the risk debate and should include as many stakeholders in the evaluation process as reasonable: "Participants should be asked to fnd a consensus of the extra margin of safety in which they would be willing to invest in exchange for avoiding potentially catastrophic consequences" (Rosa et al., 2014, p. 144). Risk assessments that are based on economic considerations alone are accompanied by disparities. If the initial conditions for decision making on risk are not equally distributed among societal actors they open the window for selfreinforcing processes of systemic risk accumulation.

#### **Conclusion**

Forest fre risks in Chile have different spatiotemporal origins and consequences. They prove to be epistemologically complex, ambiguous, and uncertain depending on the socioeconomic and sociopolitical context of their appearance. Different physical and anthropological causes and effects of forest fres cannot be clearly attributed (= complexity). Unexplained causes give rise to various logical explanations, which run counter to each other (=ambiguity) and hamper collective efforts to deal with the risk. In many cases, actors also demonstrate a lack of sensitivity to their own risk unawareness (=uncertainty). In sum, the knowledge about the causes and effects of wildfres in Chile is heterogeneous and geographically dispersed among societal actors. Empirically it becomes evident that wildfre risks in Chile are socially constructed. They depend on how fndings from natural and social science are interpreted and being implemented in standards of risk management practices. These practices also communicate risk, as in the present case via prices and access to insurance markets.

Focusing on economic-geographical explanations, in this study I have not only made it clear that forest fres are a profoundly geographical risk, but also that they represent a fundamentally collective challenge for Chilean forest regions. A single fre—regardless of its origin—can affect and destroy the forest property of neighboring actors. Accordingly, neighborhood relationships, in other words, cooperative and collective approaches to risk management practices, could have been expected. However, it turned out that forestry enterprises prefer to organize risk management on an individual basis, applying hierarchical company routines. In parallel, they buy insurance policies to transfer part of the risk to the fnancial markets. Their relationships with insurance companies are based on bilaterally negotiated contract designs and market prices for risk.

Forestry companies and insurance companies in Chile seem to have found a complementary way of dealing with risk by sharing jointly created technical risk knowledge as part of their routine risk-management practices. Both choose a management approach that reduces complexity, decouples risk, and decontextualizes risk knowledge to make forest fre risks calculable and manageable in mutually benefcial ways. They agree, on the one hand, on price mechanisms for insurance contracts as a standardized language, which has the consequence that detailed geographical knowledge on forest fre risks in Chile is explicitly decontextualized and reduced. On the other hand, they follow complementary risk-avoidance strategies whenever risks are characterized as ambiguous or uncertain.

The catastrophic forest fres in 2017 revealed the limits of standardized risk management practices. The law of large numbers and therefore the calculability of risk, in general terms, becomes less effective when large and unlikely events occur or when the causes of the risks are systemically interdependent. The latter is the worst case for the insurance business. Systemic interdependencies of risks can hide behind characteristics of ambiguity or uncertainty. In addition, there is a great danger that if actors only follow their own dominant risk discourses and ignore observations and interpretations that are due to different conditions of the spatiotemporal context of risk, the dynamic changes in the relationships between environmental and anthropogenic risk factors of forest fres in Chile remain invisible to decision makers. The catastrophic extent of the forest fres of 2017 can certainly be attributed frst and foremost to the extreme climatic conditions. However, there are also numerous indications that the fres were ignited by arson across a broad front. Unfortunately, their exact background remains unknown to this day (Saavedra, 2017).

This calls for a coordinated effort of risk management that gives regional knowledge an explicit edge and is designed as a long-term learning process. Risk management primarily covers individual views of risk. In contrast, risk governance offers a holistic approach that assigns the social responsibilities of risk takers and also considers negative externalities for other societal stakeholders in spatiotemporal variation. Of course, this does not mean that risk management has no value at all. The risk governance concept of the International Risk Governance Council, an international think tank that aims at improving the understanding and assessment of risk and the ambiguities involved, integrates risk management into a larger process of risk governance. Risk communication, which includes the transmission of risk data, but also the transfer of sophisticated risk knowledge forms the connecting link in the governance process, which is circular and refexive by nature (Renn, 2008, p. 374). Risk governance practices take the attributes of ambiguity and uncertainty in risk knowledge into account and open debates on risk that invite many societal stakeholders to take part in risk evaluation and risk assessment processes. In particular, risk governance is about transparency, which enables collective learning for a more resilient risk society.

Researchers must take the complexity, ambiguity, and uncertainty of knowledge on forest fre risks in Chile seriously. These attributes originate from social science perspectives on risk. Empirically, one cannot always separate them from each other, which is why they cannot have the objective of structuring risk governance uniformly. However, their transparent application in risk management or risk governance has consequences. The comparative clarifcation of the attributes communicates to society how risk is defned and legitimized in the future (see Bustos, Lukas, Stamm, & Torre, 2019, for a similar argument related to regional crisis management in Chile). A lack of societal participation and acceptance of normative settings can lead to adverse reaction and resistance (see, e.g., the case study on forest fres in California by Simon & Dooling, 2013).

Since forest fres are immanently spatial, the regional level promises to be a suitable scale for initializing the organization of related risk governance processes. At the regional level, changing interrelationships in risk formation can be observed and interpreted early on (Müller-Mahn et al., 2018). However, as I have shown with my statements and empirical analyses in this contribution, forest fre risks can be technically detached from the spatial dimension, especially in terms of their economic effects. Decontextualization is what makes it possible to deal with risk fnancially in frst place. In Chile, it gave rise to a reciprocal complementary relationship between hierarchy and market forms of risk management. Are these complementarities valuable for risk governance approaches as well? Some of the knowledge and guidance on certain risk management practices on the regional scale come directly from the insurance sector. Insurers utilize contract design and negotiations to offer direct and indirect incentives to decouple wildfre risks and learn how to manage them in a routinely manner. However, the extent to which different forms of risk management practices complement each other in a regional context of risk governance and lead to a higher level of local-global knowledge that strengthens the resilience of the society in the long term remains a pending issue that requires additional research efforts beyond the example of forest fres in Chile.

#### **References**

tations: Its application to discursive analysis in three different felds]. *EMPIRIA: Revista de Metodología de Ciencias Sociales, 41,* 79–102. https://doi.org/10.5944/empiria.41.2018.22605

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# **Chapter 9 Carbon Markets, Values, and Modes of Governance**

**Janelle Knox-Hayes, Jarrod Hayes, and Erik-Logan Hughes**

## **Market Governance at the Interface of Competing Logics and Modes of Organization**

Market governance of climate change is situated at the interface of two competing logics: universalistic governance predicated on technocratic norms, and the particularities of politics embedded in local cultures. Here, *local* refers to subglobal political units that are internally constructed as political entities. The issue of how global-level ideational frameworks are translated into local contexts has formed an important part of discussions on the green economy and environmental governance. A particular focus within these debates is whether and the extent to which green economy concepts and practices constitute a post-political project. The term "postpolitical" here references the idea that political problems surrounding environmental futures and resource allocation are removed from political discourse and recast in technical language (Garsten & Jacobsson, 2007; see also Chap. 4 by Stehr).

To this end, markets represent a universalistic or technocratic logic whose proponents contend that global problems can be solved with the application of one-sizefts-all solutions derived from science and economics (Bailey & Wilson, 2009). Interwoven into this logic is the idea that markets can be made to work more effectively for environmental and social equity through the recalibration of economic valuations aimed at making environmental investments more desirable not just on moral grounds or as responses to practical problems, but also because they offer proftable investment options (Newell & Paterson, 2010). This logic is reductionist,

J. Knox-Hayes (\*) · E.-L. Hughes

Department of Urban Studies and Planning, Massachusetts Institute of Technology, Cambridge, MA, USA e-mail<EMAIL_ADDRESS>
J. Hayes

Department of Political Science, University of Massachusetts, Lowell, MA, USA e-mail<EMAIL_ADDRESS>
operates at scale, and is built from codifed knowledge that exists independent of the particularities of location.

Treating climate change as a problem of internalizing economic externalities through the pricing of greenhouse gases gives authority to a particular set of economic principles. The technocratic prescriptions for resolving climate change rely on metrics to measure the effects of climate change, establishing quantitative baselines, pricing emissions that exceed quantity limits, and building a market-based governance institution to control emissions quantities through price. The role of the Intergovernmental Panel on Climate Change (IPCC) and United Nations Framework Convention on Climate Change (UNFCCC) is to build and disseminate the universalistic solution. Carbon markets will be more successful to the extent that they operate on a global scale, so proponents craft the architecture to achieve fuidity and permeate other spheres of economic activity. In theory, a global market would also allow emissions reductions to be achieved in the places of least cost by the actors who can most afford to pay for emissions reductions.

The universalistic assumptions underlying global climate policy are similar to the high-modernist logics in centrally planned state projects (Scott, 1998). These projects often fail because they are based on presumptions about the effectiveness of state coordination and do not take into account local or practical knowledge (*metis*) that arises from everyday life. Proponents of Community Based Conservation similarly argue that centralized conservation planning, by failing to engage local knowledge, sets development and conservation programs up for disaster (Goldman, 2003). The application of technocratic approaches to climate governance highlights both the universalistic assumptions about market fnancialization (cf. Hayek, 1945) that underlie the post-political consensus and how those holding them fail to appreciate the ways scale and place impact on political and economic behavior. The Kyoto Protocol's requirement for commoditization, standardization of measurement, and homogenization matches well with high-modernist ideology.

The Kyoto Protocol's authors set out the trade of certifed emissions reductions as a principal policy response to climate change. The Protocol's framework thus positions commodifcation through the expansion of carbon trading systems as central to resolving the problem of climate governance. As institutions, carbon markets can be expected to transfer and develop with a degree of isomorphism. Indeed, to some extent the hope of building global governance through interconnection of regional schemes relies on the compatibility of markets in each jurisdiction. However, by focusing on market mechanisms, the Protocol's authors marginalize other policies (taxation, command-and-control, technology transfer) that may be more effective in some political economies (Knox-Hayes, 2012). Although governments have mobilized a primarily techno-economic fx to address climate change, this is not necessarily indicative of the solutions desired by various societal stakeholders (Owens & Cowell, 2011).

Furthermore, carbon markets must be translated from the global scale into the particularities of each operating jurisdiction. Here the universalistic logic encounters different sociopolitical and cultural governance logics and values operating on the ground. Variations in political-economic cultural contexts—understood as socially established norms, rules, and expectations that defne how social actors operate and interact (Katzenstein, 1996, p. 6)—play a key role in shaping how societies respond to global imperatives. Culture infuences the conduct of economic interactions within specifc societies as well as the role of economic processes in policy and society. As the markets are constructed, everything from the nature of the legislation that is developed, to the organizations used to operationalize the markets, to the way in which various polities respond to the idea of market-based governance, are affected. The dynamics on the ground affect not only the shape that the markets take, but also the ways in which they perform.

The variability in market form causes problems for efforts to establish climate governance arrangements that rely on universalistic assumptions about socioeconomic systems. Cultures are not monolithic, of course, and vary as the scale and location of analysis shift, and care is needed in drawing conclusions about the infuence, causal or otherwise, of culture. Nonetheless, there is value in looking at the infuence of culture at different scales as a means by which to draw attention to differences and the reasons for these differences. Moreover, by examining links between culture and climate governance we recognize that climate policy is fundamentally political in nature.

Another important point of analytical concern is the issue of scale. Subnational governments, nongovernment organizations, corporations and government agencies in "hybrid" (combining state and non-state actors), and transnational environmental governance networks play an increasingly important role in climate governance (Andonova, Betsill, & Bulkeley, 2009; Betsill & Bulkeley, 2007; Hoffmann, 2011). One of the effects of this dispersal of governance is a resistance to efforts to establish universalistic environmental governance arrangements as regional/local governments, businesses, and communities reinterpret governance concepts through the particular lenses of their beliefs, traditions, circumstances, and dilemmas (Krueger & Gibbs, 2010). The creation of standards and agreements through which carbon management occurs can similarly vary (Ocampo, 2011). As a consequence, the institutional landscape of carbon governance is highly variegated across initiatives, actors, and countries. The translation of international commitments into action remains reliant on and imbedded within territorially bound politics (While, Jonas, & Gibbs, 2010). Thus, this plurality of approaches can in part be seen as a response by the various actors involved in promoting and implementing the carbon governance to integrate—and potentially challenge—neoliberal capitalist attempts to ft environmental problems within prevailing political-economic paradigms (Pattberg, 2007; Redclift, 2012).

The organizational terrain of policy further complicates the carbon governance landscape. Specifcally, political economic culture interacts with modes of network governance. Provan and Kenis (2008) provide a useful typology for mapping networks: participant-governed networks (shared governance), lead organizationgoverned networks (lead organization), and network administrative organizations (NAOs). These network governance types are informed by their position along two dimensions. The frst addresses centralization. For networks governed internally by participant organizations, those that exhibit a centralized broker are classifed as

lead organizations. Those in which governance is decentralized across participants are classifed as shared governance. The second axis of classifcation deals specifcally with centralized modes of governance. Here, the distinction lies between those that have a centralized broker that is internal to the network (lead organization) versus those in which the broker is an organization external to the network (network administrative organization/NAO).

Taken together, logics of governance and modes of governance represent two important axes along which climate policy can be mapped and assessed. In this chapter, we seek to assess how policy intersects with these axes and in the process provide a broad-based qualitative and quantitative assessment of how geographically specifc sociocultural factors shape intersubjective understandings of markets in general and carbon markets in particular. To do so, we adopt a cross-national perspective, examining and evaluating the intersubjective meanings of carbon market formation drawn from interview data of market makers across the United States, Australia, China, the EU, Japan, and South Korea. In the next section, we address the role of technocratic norms, and in so doing provide an extensive overview of our methodology.

#### **Technocratic Norms and Political Context**

#### *Methods of Analysis*

Drawing on 245 interviews with actors from various institutions involved in climate policy and market development, including professional service frms, legal frms, and regulatory agencies in the EU, US, Australia, South Korea, China (including Hong Kong), and Japan, we utilize techniques from grounded theory to explore perspectives on market-based climate governance. The interviews were semistructured to guide the conversations while allowing respondents to address topics they considered signifcant (Clark, 1998) and lasted between 45 min and 2 h. Individuals were asked about the nature of their frms, practices, network relationships, perspectives on climate policy and market-based governance, and the importance of various types of expertise in developing climate policy and markets. We then triangulated the responses with each other and with relevant policy and organizational documents.

We coded interviews to generate insights into the relationship between technocratic norms and politics in climate policy, and to identify attributes of market-based governance in each geographic region. We deployed two coding techniques. First, we treated the interview transcripts as data and analyzed them in a coding pattern from raw text to frst-order concepts, and then to analytic categories (Eisenhardt & Graebner, 2007). Specifcally, we coded two questions to generate insights into how market-based governance is perceived in each region: What are the advantages or disadvantages of using markets to govern climate change and what are the opportunities and challenges of the creation of carbon markets? We used our analysis of these questions to gauge positive and negative associations of market-based climate governance, as well as to identify governance concepts that are positively associated with market-based governance in the form of opportunities and challenges.

Second, following Gioia (1998), we treated interlocutors as "knowledgeable agents," people who know what they are trying to do and can explain their thoughts, intentions, and actions. This grounds the study in accounts of the informants' experience (Gioia, Corley, & Hamilton, 2013). The knowledge provided by key informants informs our understanding of the ways in which each region has negotiated tensions between technocratic governance norms and place-specifc politics. We have used anonymized quotations to support key observations and combine them with relevant policy, organizational, and press material where appropriate.

#### *Coded Concepts of Market-Based Governance*

Through the coding of the interview data, we identifed seven prominent perceptions of the advantages and opportunities of carbon emissions markets (effciency, technology investment and innovation, global scale, fexibility to participate, political viability, and capacity to reduce emissions) and six prominent disadvantages and challenges (reliance on governance cohesion, political uncertainty, technical complexity, time to translate, prevalence of economics, and intangibility).

#### **Advantages and opportunities**

The concept of *governance effciency* refers to the fact that markets are a more effcient form of governance. Respondents often identify effciency with the ability to resolve climate change using economic techniques that would not require signifcant behavioral changes, particularly by bringing about technological development. Similarly, the concept of *effcacy* is described as providing transparency for government and industries to make production decisions through the carbon price. There was an associated belief that the price is useful in identifying and distributing the "real" value of low-carbon production.

Some participants identifed the benefts of markets as being associated with the *fexibility* they give various actors to participate in the governance of greenhouse gas emissions. Unlike taxes and command and control types of regulation (such as effciency standards or renewable energy portfolios), the market generates a proft incentive and allows a range of organizations from banks to professional service frms to participate. Many individuals also expressed the belief that the market is more fexible as a governance mechanism in that it allows actors to purse a variety of strategies to reduce emissions rather than having the government mandate a set course of action. For these reasons and others, participants also identifed *political*

*viability* as an advantage of emissions markets. In many jurisdictions there is less political resistance to emissions trading than to other forms of governance. Some interlocutors argue that a market is the only palatable solution for industry. This is a popular perspective in the United States as well as in China, where there is considerable resistance to the idea of taxes.

The emphasis on *investment and innovation* refects a belief that through the creation of a price signal carbon markets effectively distribute revenue to the "best" developers of technology. Respondents additionally identify the ability to *operate on a global scale* as a market advantage, suggesting that carbon markets can provide liquidity, and the potential for offshoring (of fnance) and offsetting (of fnancial credits) in ways other governance mechanisms cannot. This argument primarily rests on the idea that markets are transnational and do not respect national boundaries, which stands in contrast to other approaches like command and control or taxation where the generative force of action lies frmly within states. Also note the emphasis of scale and how it is seen as generating ease and affordability. Finally, several respondents (thought fewer than might be expected) identify the ability to *reduce emissions* as an advantage of market-based governance. Not surprisingly, they view the pathway to emissions reduction through the lens of technological development rather than behavioral change. Participants express confdence that a price for carbon will give renewable energy technologies an advantage.

#### **Disadvantages and challenges**

Participants identify six primary disadvantages and challenges of market-based governance. Although markets have the ability to operate at the international level, participants identifed *reliance on governance cohesion*, or the idea that markets need to operate according to common rules in order to be effective, as an associated disadvantage. As witnessed by the challenges in achieving binding targets under the UNFCCC, this is a major challenge for climate governance. Additionally, participants identify domestic *political uncertainty* as a major challenge, because carbon markets are derived from and reliant upon politics for their existence. Here the belief seems to be that carbon markets are effcient except for political contestation, which is thought to destabilize them.

In addition, participants identify the *technical complexity* required for markets to operate effectively. In addition to the basic rules and regulations of the capping of emissions and distribution of allowances, to be effective the markets require a system of standards and infrastructure to measure and monitor emissions as well as enforcement mechanisms for the actors under the cap. There is considerable technical complexity required to build such a system, and unless the policy details are correct, there is strong potential for the system to fail. Many interlocutors point to the early phases of the EU Emission Trading System (ETS) as an example of the technical complexity required to build an emissions trading system as well as what happens (e.g., price collapse) when the technical details are incorrect.

Associated with this concept is the idea that it takes *time to translate* markets into new jurisdictions and that they are a slower form of governance. The concept is particularly raised by participants in Asia, with recognition that to be effective, the markets not only have to be built to operate according to a technically high capacity, but that they must also be translated to ft different sociopolitical and cultural norms in the jurisdictions where they are being built.

One of the drawbacks identifed is that markets give *prevalence of economics* over the environment and often achieve economic gains without environmental benefts. In particular, markets treat climate change as though it were purely an economic problem, with economic concerns. Many actors join the markets not to reduce emissions but to pursue the proft incentive. This concept is associated with concern that markets do not reduce emissions because of the inability to *price the intangible*. Here there is recognition that the absence of carbon dioxide is an intangible commodity, and considerable skepticism over the concept of additionality of offsetting (the requirement that allowances and offsets produce emissions additional to what otherwise would have occurred). The diffculty in pricing carbon dioxide and associated negative and positive externalities generates doubt as to whether emissions reductions are real.

We have summarized these concepts with exemplary quotes in Tables 9.1a and 9.1b (Knox-Hayes, 2016, p. 53). Quotes in the frst section of the table exemplify universalistic conceptions of markets as solutions to climate change. The second section embodies counter-conceptions that underline the political nature of markets and doubts about their universality. Importantly, many of the comments in the second section of the table stress the role of scale and cultural difference in shaping how universal, technocratic norms are interpreted and applied, such as the diffculties of developing common global rules for carbon markets. The two sets of observations in turn provide a basis for synthesizing these cultural variances.

#### *Comparisons Between East and West*

We identifed the coded concepts as common responses to the questions of market advantages/disadvantages and opportunities/challenges. Given that there were 245 responses to the data recorded, it was possible to do statistical analysis of the data to look for macro trends across the regions. In Table 9.2 we provide a count summary of the identifed concepts according to location, dividing the region of residence into six categories: the United States, the European Union, Australia, China, Japan, and Korea (Knox-Hayes, 2016, p. 59). It should be noted that to maintain statistically comparable sample sizes, respondents from Hong Kong have been grouped into the China category. Hong Kong serves as one of the fnancial centers for the trade of carbon out of China, and these interlocutors were asked questions specifc to the developing Chinese carbon markets. London was likewise coded as part of the EU. It is one of the fnancial centers of the EU ETS and respondents were asked questions specifc to the EU ETS. Table 9.2 shows that neither conceptions of

**Table 9.1a** Summary of positive concepts of market governance from coded interview data

(continued)

**Table 9.1a** (continued)

*Note.* Reprinted from Knox-Hayes (2016, p. 53). Copyright 2016 by Oxford University Press*.* Reprinted with permission

**Table 9.1b** Summary of negative concepts of market governance from coded interview data

(continued)

**Table 9.1b** (continued)

**Table 9.1b** (continued)

**Table 9.1b** (continued)

*Note.* Reprinted from Knox-Hayes (2016, p. 53). Copyright 2016 by Oxford University Press*.* Reprinted with permission

cultural difference nor conceptions of the technocratic/political nature of markets are universally held, thus highlighting the fundamentally contingent nature of climate policy in different national contexts despite the underlying norms that inform it at the global level.

In total, the data contain 270 identifcations (some participants' responses are coded for more than one concept) of positive constructs of market-based governance and 189 identifcations of negative constructs. Additionally, over half of the respondents (139 out of 245) directly identify effciency and or the effcacy of a carbon price as advantages of market-based climate governance. The overwhelming majority of positive responses regarding the utility of carbon markets give some validity to the notion of a post-political consensus around market-based climate governance. Some interlocutors voiced support for markets even when recognizing the diffculties involved in pricing environmental externalities:

[We] believe in a market-based instrument, a carbon price. That said, markets have a history of creating externalities and mispricing things that should have a price. So, I mean, creating a market to fx a problem that was caused by the market is ironic and I guess we understand that. But, we would say, yes, it's positive. I mean, how else can you possibly address environmental issues that are otherwise not a part of our daily economic and social life? (Senior Associate, Consultancy, Melbourne)

Surprisingly, however, only twenty respondents (8.1%) directly suggested that carbon markets have the positive beneft of reducing emissions. Many of these respondents suggested that the way in which a carbon price has a positive impact is by generating technological innovation and investment.

When the respondents are categorized as either Anglo/European (US, EU, Australia) or Asian (China, Japan, South Korea), differences in perspective are even more surprising. The respondents from Anglo/European countries produced 213 identifcations of advantages and opportunities of market-based governance of climate change and only ninety-six disadvantages and challenges (a positive-negative ratio greater than 2:1). In general, respondents from these regions are much more likely to have a positive perspective of how the markets operate. In contrast, individuals from Asian countries are much more likely to have a skeptical perspective of the use of market mechanisms to govern climate change. Individuals from China, Japan, and South Korea generated ffty-seven identifcations of advantages of market-based governance, in comparison with ninety-three identifcations of disadvantages (2:3 positive-negative ratio).

We explore the reasons for the skepticism in Asia in greater detail below. In short, however, the differences between Anglo/European and Asian countries refect underlying differences in beliefs regarding the role that markets play in governance, the role of different institutions and sources of authority in generating policy, as well as different aspirations and values. To better distinguish the nature of these differences, we statistically tested the signifcance of differences in responses across regions (Table 9.3).

#### *Statistical Analysis of Regional and Occupations Difference*

We used logistic regression and correlation analysis to evaluate differences across the regions (Table 9.3) as well as across industry sectors (Table 9.4). As with region of residence, we coded occupational background to maintain statistically comparable sample sizes. We distinguished fve categories: fnancial services (banks, brokerages, hedge funds, exchanges), professional services (accountancies, legal frms, news wire, consulting), industry (energy companies, manufacturing companies, project developers, industry associations), government (regulatory agencies, policymakers, staffers, legislators), and NGOs (environmental advocacy, think tanks, academics).

We report statistically signifcant correlation coeffcients in Table 9.3 (Knox-Hayes, 2016, p. 60) for region of residence tests and in Table 9.4 (Knox-Hayes, 2016, p. 61) for occupational sector analysis, and we tested responses from each category against all others. The results can be interpreted as follows: In Table 9.3, the positive 0.33 under effciency for Australia signifes that compared to respondents in all other geographies, individuals from Australia are 33% more likely to identify governance effciency as an advantage of market mechanisms to govern carbon emissions. The triple asterisk beside 0.33\*\*\* signifes that the difference is statistically signifcant at the 0.99% confdence interval. In contrast, the negative 0.23 in China's row under effciency indicates that respondents from China are 23% less likely than respondents in all other geographies to identify governance effciency as an advantage of market mechanisms.

Respondents in the United States are more likely to identify global scale and the ability to reduce emissions as advantages or opportunities of using emissions markets to govern climate change. In general, participants in the United States have a more positive perspective about the potential of market-based governance. There is strong belief in the utility of market-based governance in the US, which has clear linkages to the perspective that the markets can succeed in reducing emissions. The focus on global operation, particularly among individuals from the fnancial services industry, relates to logic that markets operate best at a global scale. Thus, carbon markets can be effective at a global level, and in the process would also displace some of the burden of reducing emissions from the United States, which is one of the largest emitters of greenhouse gases. Respondents from the United States are less likely to identify technical complexity, time to translate, and prevalence of economics as disadvantages of emissions markets. This fts with the generally neoliberal perspective and lack of concern over economic or incentive-based regulatory mechanisms.

Australian respondents are more likely to positively identify governance effciency and effciency of a carbon price as advantages of market-based governance. This refects the strong emphasis on technical competence in Australian governance. Across all sectors, respondents from Australia demonstrated a high degree of technical (particularly economic) competence. By contrast, Australians are less likely to identify fexibility and global scale as advantages of market-based governance. In

*Note.* \*Signifcant at the 90% Confdence Interval, \*\*Signifcant at the 95% Confdence Interval, \*\*\*Signifcant at the 99% Confdence Interval. Reprinted from Knox-Hayes (2016, p. 61). Copyright 2016 by Oxford University Press*.* Reprinted with permission general, the focus of Australians seems to be much more domestic, even if there is recognition that efforts to address climate change come from an obligation to be a good global citizen. With respect to disadvantages, Australians were more likely to identify the challenges of political uncertainty. This perhaps refects the tumultuous political experience Australians have had with emissions trading. Finally, Australians are less likely to express concern over the time it takes to translate markets into local context, and less likely to identify the disadvantage of the fact that markets privilege economics over the environment (interview respondents across occupational sectors in Australia demonstrated a sophisticated understanding of, and comfort with, the application economics).

Respondents from the EU were much more likely to identify global scale as an advantage of market-based governance with a correlation coeffcient of 0.28. Many respondents expressed the idea that climate change is a unifying policy because it cannot be addressed by any nation-state acting on its own. As such, it helps consolidate policy authority at the EU level. Furthermore, the EU has taken global leadership on the issue of climate change, which is a source of pride amongst policymakers and market makers. EU responses were also strongly correlated with the disadvantage of carbon markets requiring governance cohesion, with a correlation of 0.43. In line with the global focus, EU respondents acknowledge that to be effective markets must be international and interconnected, which requires a strong degree of governance cohesion that does not yet exist in the international system. The EU remains one of the strongest proponents for a binding agreement under the UNFCCC. Finally, respondents from the EU are less likely to identify technical complexity and time to translate as disadvantages of market-based governance. This aligns with the fact that the EU ETS was one of the frst established systems as well as the fact that the EU, and particularly the Commission, has strong technical capacity.

Refecting a divergence in values vis-à-vis other regions, Chinese respondents are less likely to identify effciency, global scale, and the ability to reduce greenhouse gas emissions as advantages of market-based systems. The only advantage Chinese respondents are more likely to identify is political viability. Many interlocutors suggested that, despite the fact that the Chinese government uses many command and control measures for regulation, they are also concerned about minimizing unrest among industry and society. Markets are seen as a more politically viable approach to climate change than taxes or command and control. Chinese respondents are less likely to indicate governance cohesion as a negative aspect of market-based governance. Chinese emissions markets are in some ways more fexible because they are being tried in different regions with an experimental approach. This generates a more local focus.

The Chinese are also less likely to indicate the inability to price the intangible as a negative aspect of market-based governance. This may refect the fact that China was the largest host country of Clean Development Mechanism (CDM) projects, and most concerns about pricing the intangible relate to offsetting in the CDM. Several respondents identifed the large number of operating CDM projects as a reason the government should use markets rather than taxes or command and control to address climate change. Finally, respondents from China are more likely to identify the time to translate and the preference for economics over the environment as disadvantages of market-based governance. The respondents were concerned that markets be better tailored to cultural expectations once they are scaled to the national level and begin to have greater effect on industry. They also expressed concern that the markets would be focused more on economic beneft (i.e., profttaking), for although the environment is increasingly a concern in China, development is still the greatest priority.

In Japan, respondents express a far more negative perspective over emissions markets than in any other region. Japanese respondents are less likely to identify effciency, technology innovation and investment, global scale, and capacity to reduce emissions as advantages or opportunities, and more likely to identify technical complexity, time to translate, and economic prevalence over the environment as disadvantages of the markets. The Japanese place strong emphasis on the need for technological development to resolve climate change, but express considerable skepticism that carbon markets work effciently and effectively to generate environmental impact. There is also a recognition that Japan is culturally different from other regions like the EU, where markets have been trialed, and that it would take considerable time to develop a market approach that would work in Japan. To some extent, this is the solution the Japanese have identifed with their Bilateral Offset Credit Mechanism/Joint Crediting Mechanism (BOCM/JCM). Finally, the responses from Japan are negatively correlated with concern over governance cohesion, which refects the fact that there is a much greater domestic than global focus. For example, the Joint Crediting Mechanism is designed to allow each host country that partners with Japan to independently tailor the program to their needs.

Korean respondents are more likely to identify fexibility and political viability as positive advantages of market-based governance and more likely to identify technical complexity and time to translate as disadvantages. Several interlocutors suggested that the government tends to be focused on command and control, so markets would generate a welcome change. Additionally, as in Australia there is strong technical competence in Korea, where the ministries are very infuential, and therefore a high degree of concern for the creation of technical policy. Korean respondents are more likely to see technical complexity as a challenge, in part because the carbon markets are managed by the ministries, particularly the Ministry of Environment and Ministry of Trade, Energy, and Industry, and treated as technical devices. Respondents also expressed more concern with the time it would take to translate and operationalize the markets.

With respect to the occupational sector (Table 9.4), there are only a few statistically signifcant differences among the groups. Unsurprisingly, individuals from fnancial services are more likely to identify effciency, global scale, and reducing greenhouse gas emissions as advantages or opportunities of market-based governance and less likely to identify technical complexity as a disadvantage of marketbased governance. Members of the fnancial services are among the strongest proponents of market-based governance and are comfortable with the technical requirements of structuring carbon as a commodity. In contrast, individuals from the professional services are less likely to believe markets have the capacity to reduce

emissions, and more likely to see technical complexity as a disadvantage. These frms also stand to gain from servicing emissions markets, but in contrast to the fnancial services industry they beneft from the markets regardless of whether or not the markets are successful because their revenue is generated from service fees. For example, legal frms generate revenue from writing contracts for carbon credits, structuring products, and litigating disputes regardless of whether or not the price of emissions is high. They are consequently more familiar with the technical complexity required for markets to operate effciently, and more skeptical of the ability of markets to reduce emissions.

Individuals from industry are less likely to see price effcacy as an advantage of emissions markets. Even if the markets are a more fexible means of governance, they still place a burden on the industry sectors subject to a cap. Individuals from government are more likely to recognize political uncertainty as a disadvantage of emissions markets. These individuals operate most closely and are most familiar with the political tensions involved in markets. Whether or not respondents were in favor of the markets, they recognized that they operate only if they have political support. The markets require a consistent and stable regulatory framework to be effective. However, as in the case of Australia, the regulatory framework is subject to change every time there is an election. The political turnover creates market uncertainty. Finally, NGOs are unsurprisingly less likely to identify reducing emissions as an advantage of emissions trading. NGOs tended to be more concerned with the environmental impacts of governance and more skeptical of market-based approaches.

In sum, statistically signifcant regional variations around the idea of marketbased climate governance belie the apparent consensus in the Anglo/European space regarding markets as a basis for managing climate change. European respondents emphasize global-scale coordination and governance beyond the nation-state. US respondents hold a stronger belief in the effcacy of markets as a means of reducing emissions, and Australian respondents demonstrate a more internal focus and a stronger emphasis on technocratic norms. Australian's associate market-based governance with fairness but recognize the limitations.

In the East there is much greater skepticism in general about the use of market mechanisms for governance. The respondents who favor markets tend to demonstrate different priorities. The perspective from respondents in China is perhaps at odds with the government rationale for pursuing market-based governance. In China, markets are associated with modernity and China's international standing relative to other great powers, but more importantly as the path to ecological modernization through which economic growth will be connected with environmental preservation. Nevertheless, market participants express skepticism about where the markets come from, the technical complexity involved in creating them and how they will relate to a Chinese institutional setting of governance.

In South Korea, there is a similar association with development and international standing through the construction of markets. To the extent that they provide fexibility, the actors who have considerable expertise (particularly within the ministries) see the markets as an advantage. Nevertheless, there is also recognition of the complexity involved in building effective carbon markets, and concern over the time it will take to properly operationalize them. Japan is the country most skeptical of emissions trading, with individuals across occupational sectors voicing strong concerns. Some of the most vocal critics come from within the industrial and fnancial service sectors. The strong negative associations of market governance, particularly regarding the technical complexity of the markets and prevalence of proft over environmental impact, are derived from cultural norms and values that differ from those of the Anglo/European context.

#### *The Role of Politics in Shaping Political Norms*

The differences in how markets are conceptualized between regions highlight the importance of intersubjective coherence in perspective within regions. The idea of market-based governance resonates in different ways in different geographies, but there is also a surprising degree of coherence in concepts within and even between places. In countries like Australia and the United States, effciency is a major goal. In Europe, the ideas of economic opportunity and global leadership predominate in discussion of markets. The term "modernization" is common in both China and South Korea. In Japan, respondents associated their skepticism of fnancial markets by describing emissions markets with the term "money game." Although these differences in conception and in the language used to describe markets are interesting in and of themselves, what is particularly interesting is the way markets permeate the social conscious and resonate with their own language in different places. This suggests that scholars and policymakers cannot speak of "the market" because processes of syncretism driven by local sociopolitical factors produce multiple permutations of "the market," each with greater or lesser degrees of divergence from the abstracted ideal. This has potentially signifcant ramifcations for using markets to manage climate change, which requires markets to have an extremely high degree of interoperability and thus low tolerances for divergence.

Consequently, in addition to communicating particular economic values about energy use and effciency through a price signal, markets also communicate a range of other concepts and social values. The language that permeates the markets in each region refects common understandings of what the markets are expected to be as well as who has the authority to govern and shape them. As Donald MacKenzie (2009) suggests, material agencements (combinations of human beings, material objects, and technical systems) structure markets. It is a combination of human agency, organizational structure, and systems of meaning that constitutes markets.

The global imperative to address climate change through technical framing as generated by the UNFCCC provides both a logic of action as well as an infrastructure of organization. It suggests, and relies upon, institutional isomorphism of the markets, in particular giving a common basic framework: a cap, the allocation of permits, a commodity of trade, and comparable organizations of monitoring, verifying, and reporting. The agencies with expertise in navigating these roles take on market authority. And yet, the global imperative and isomorphic form (markets copied from the structure of the EU ETS for example) competes with economic *metis* grounded in sociocultural and political norms. For example, in China private accountancies, consultancies, and legal frms do not have the same authority as the National Development and Reform Commission to perform the functions of monitoring, verifying, and reporting. Conversely, in the United States the construction and functioning of the market lies largely in the hands of private sector accountancies, consultancies, and legal forms. The basic shape and function of the market is therefore translated through different infrastructures and the isomorphism disappears as the markets are built and enacted through different cultural logics.

#### **Network Governance in the Context of Market Cultures**

Linking network governance to market culture allows for additional insight into the dynamics that underpin climate policy. Because climate policy requires coordination across multiple organizations within the complexity of contemporary political economies, the concept of network governance can provide important analytical leverage. Provan and Kenis (2008, p. 231) defne a network as three or more legally autonomous organizations working collaboratively toward a common goal. By emphasizing multiple nodes of agency, this approach allows for a more realistic engagement with climate policy, in which multiple organizational actors must be harnessed into collaborational networks to produce the profound shifts in energy production and use required to reduce carbon emissions.

All networks are not the same, however. Provan and Kenis (2008) identify two cleavages. First, networks vary by the degree of centralization. At one end—called shared governance—are completely decentralized networks in which all the participants interact and governance direction is equally shared. The underlying market cultures shape their function and organization. At the other end of the spectrum termed lead organization—are networks in which one or a small number of organizations take the lead directing governance and contact between the other organizations in the network is limited. A second cleavage concerns the source of leadership. At one end are networks that are governed by their own members. At the other are networks that are governed by organizations external to the network. These external governors are called network administrative organizations (NAO) (Provan & Kenis, 2008, pp. 233–234). In their comprehensive review of the network governance literature, Dal Molin and Masella (2016, pp. 497–498) identify an additional set of six factors: trust in others to take account of interests, size of network, goal consensus, leadership that support governance, embeddedness of goals in network relations, and diversity of network members. Table 9.5 below combines the typology identifed by Provan and Kenis with the factors outlined by Dal Molin and Masella and applies them to the United States, Japan, European Union, China, South Korea, and Australia. Clearly, these polities differ quite dramatically. Much of this difference is due to differences in the market cultures.

**Table 9.5**

Network architype defning characteristics

**Table 9.5**

(continued)

**Fig. 9.1** Form of network governance plotted against market culture. Source: Design by authors

In Fig. 9.1, we present the differences in network governance mapped onto market culture.

With this fgure, we clearly demonstrate the relational position of the various polities with respect to climate policy. The United States, more than any of the other countries surveyed, indicated a strong positive correlation with the idea that the capacity of market governance to reduce emissions is an advantage. The United States' positioning on the y-axis is due to the dynamics created by the two-party system and the profusion of political lobbying. Although the United States bears potential to demonstrate characteristics more akin to that of a lead organization, the checks and balances system of the US system along with strong party polarization are indicative of a form of shared governance. As such, goal consensus within the parties is high, but goal consensus within the federal government is low. Similarly, trust between the parties is low, but within each party is moderately high. Additionally, lobbyists from a variety of business industries have a large presence in American governance. Campaign contributions from wealthy individuals and special interest group have reached historical highs since the Citizens United decision, adding more voices to the American political process.

As evidenced by the fgure, Australia's culture is moderately state oriented and network is moderately lead oriented. Australia respondents were of the opinion that although a private-sector-driven market solution to climate change is likely the optimal solution due to how markets incentivize innovation, it is unlikely that consensus on a global market structure will ever be reached. The Australian view is that pricing within a carbon market is fraught with challenges due to the uncertainty of pricing environmental impacts and the challenges of maintaining stable, long-term projections amidst that uncertainty. The uncertainty surrounding pricing and the unlikelihood of global consensus places Australia in favor of more state-controlled responses to climate change. In relation to governance, Australia is dominated internally by a strong private sector and is host to a similar lobbying presence like the US. However, the party in power in Australia has control over the ministries, indicative of a lead-organization style of governance.

By contrast, the EU demonstrates characteristics that align well with the NAO form of network governance. The number of member states is moderately high, with moderate trust density between member states and the EU itself and between member state dyads. The leadership style is an external network organization, the EU, overlooking participant member states. Additionally, because of the separation of the member state governments from the EU, lobbying does not affect EU governance in the same way that lobbying impacts the United States: Member-state politicians are not the same politicians as those who represent the member state at the EU level. The EU respondents indicated a strong correlation with the reliance on governance cohesion as a disadvantage for global climate markets—EU respondents acknowledged that markets must be international and interconnected to be effective, but the international governance cohesion necessary does not yet exist. The aforementioned response is refected in their positioning towards the center of the x-axis, with a slight preference for markets.

Japan differs from the rest of the study polities in that the Japanese respondents indicated a strong preference for domestic solutions to climate change through technological development. The Japanese BOCM/JCM is structured to allow each host country to partner independently with Japan, creating highly specialized partnerships as opposed to facilitating participation in a general, global system. Goal consensus among Japanese ministries and industries is high with a low diversity of opinions, indicative of a shared form of governance. Finally, Japan's position on the x-axis is refective of the respondents' consensus across different occupational sectors that the faults of market governance are high, coupled with their emphasis on a "good" or "technological" market as the solution to emissions reductions.

Korea sits with Australia and China in the State and Lead quadrant. Although the Korean respondents appreciate the fexibility and viability that carbon markets offer, they do not see carbon markets as a mechanism for combatting climate change that can be easily implemented at a global scale because of the differences between industries in terms of the instruments and processes that are used. The leftward positioning on the x-axis is complemented by a more lead-organization style of network governance, as the Korean ministries are highly infuential within the government and contribute to a single national agenda.

Finally, China most strongly demonstrates the characteristics of a lead organization as its form of network governance, with a substantial emphasis on state governance for climate change solutions. Chinese respondents indicated a negative correlation with the idea that markets are a more effcient form of governance than the state, especially considering the amount of time it would take to develop the necessary institutions and regulatory agencies within China to monitor a carbon market. The preference towards a state solution is indicated by China's left leaning position on the x-axis. Additionally, applying the Provan and Kenis typologies of network governance while using the expanded Dal Molin and Masella characteristics, we have determined that the size, embeddedness, and leadership qualities of China are most like those of a lead organization, with the remaining characteristics of trust, diversity, and goal consensus indicating state cohesion and cooperation due to the highly centralized nature of the Chinese government.

#### **Market Perceptions: From General Claims to Specifc Cases**

Market-based governance is driven by assumptions that climate change is a technoeconomic rather than a sociopolitical problem and is thus amenable to universalistic neoliberal-economic policy prescriptions. However, these prescriptions interact with political and social systems in different scalar contexts, producing variations in how the market is understood and operates. With our analysis presented here, we show that climate policies cannot neglect the ways in which differences in scale and place—local, national, and regional—impact on how international mandates translate into action. Shortcomings in the global effort to address climate change can thus in part be traced to failures to appreciate how economic *metis* shapes economic practice at different scales and in different places. As suggested in this chapter, culture at the national and regional levels plays a crucial role in determining the enactment of international imperatives. Markets do not exist in institutional vacuums and failure to account for local economic knowledge means that efforts to establish governance on the basis of universalistic economic behavior are unmoored from the ways states and societies practice economics. These variations also play out across different network governance forms, making for a complex climate policy landscape.

The mix of social and governance contexts and motivations behind policy suggests that greater fexibility is needed at the international level to enable states to act on climate change. The arrival of different polities at different policy solutions refects the distinctive sociopolitical systems in which they are formulated. In the EU, the market has been implemented quickly but has struggled to make even slight adjustments. In the US, global and popular discourses have generated periods of heightened concern over climate change, only for these to be destabilized by "economic realism." Nonetheless, well-established bureaucratic systems to manage airquality-control problems in the 1970s and 1980s in California enabled the establishment of a technocratically managed system, albeit years after the EU ETS. In Australia, a strong bureaucratic culture propagated carbon-pricing policies only for political turmoil to threaten to unravel the system a few years later.

In China, the emissions markets have been established as political compromise to mitigate climate change but in a less stringent manner than the usual command and control approach. Although the strategy of trialing different forms across seven regions has lent greater fexibility to the system, it to a degree has also marginalized the impact of emissions trading. In Japan, attempts by the Ministry of Environment to institute regional and domestic emissions trading systems have been met with strong resistance from industry. Cultural norms dictate that markets must have a material impact. The compromise has been to adapt the basic idea and structure of emissions market or offset trading and apply it to the transfer of technology to developing regions. Although the approach is benefcial for both energy and emissions gains, it has pulled Japan from international negotiations. In South Korea, the markets adapt well to the strong technical capacity and existing authority of various ministries. And yet, the South Koreans have struggled to scale the markets to a size and form that best fts the conditions of their relatively consolidated industrial groups. As we have demonstrated in this chapter, the idea that climate change can be addressed through a single, unifed techno-economic prescription does not hold against empirical reality.

#### **References**

**Open Access** This chapter is licensed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

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# **Chapter 10 The Fight Against Corruption in Brazil: A Case of Good Governance?**

**Markus Pohlmann and Elizangela Valarini**

Since the start of Operation Carwash (Operação Lava Jato)1 in March 2014, politics, senior executives, and the judiciary have been in great turmoil in Brazil. Having ensnared the construction industry and Petrobras, the state-run oil company, the specter of corruption is now threatening to envelop other state-owned enterprises, such as the nuclear energy industry, with the construction of nuclear power plants as well as further Brazilian federal entities, such as the Brazilian Development Bank (BNDES), a Brazilian federal bank, the Caixa Econômica Federal, etc. Operation Carwash became the largest ever ongoing criminal investigation in Brazilian history. In special, the criminal process against the former President Luiz Inácio Lula da Silva and his political party, the Workers' party (Partido dos Trabalhadores (PT)), detonated a political tinderbox. Not only have the accusations against ex-President Lula, the impeachment against his successor Dilma Roussef, the arrest of the President of the Parliament, Eduardo Cunha of the Brazilian Democratic Movement Party (Partido do Movimento Democrático Brasileiro (PMDB)), and current proceedings against roughly 279 politicians robbed the Brazilians of their sleep, the sheer multitude of corruption scandals in the economy also keeps them in suspense.

What is going on in Brazil? And what is behind these scandals? It seems that tolerance of corruption in Brazil reached a turning point. Whereas criminal processes and sentences were once slight and rare, and only pronounced with the exclusion of the general public, they are now coming fast, hitting hard, and reaching the

1The name Operation Carwash have been giving from Brazilian Federal Police to the uncovered scheme of money laundering that was linked to a chain of gas stations and car wash systems. Later, the data showed that this case was linked to the Petrobras corruptions scheme.

M. Pohlmann (\*) · E. Valarini

Max-Weber-Institute of Sociology, Heidelberg University, Heidelberg, Germany e-mail<EMAIL_ADDRESS><EMAIL_ADDRESS>
J. Glückler et al. (eds.), *Knowledge for Governance*, Knowledge and Space 15, https://doi.org/10.1007/978-3-030-47150-7\_10

news. With the enacting of the Freedom of Information Act no. 12.527/2011,2 anyone who is curious enough can easily follow the trials on offcial sites of the justice system, but also in the media. Also, punishment became harsher. For example, the federal court of Paraná sentenced Marcello Odebrecht, the president of one of the biggest business groups in Brazil, and a descendant of a German immigrant family, to 19.4 years on the charges of bribery, participating in organized crime, and money laundering.

In our article, we will investigate the unlawful practices of the Brazilian construction companies involved in the Petrobras plot and their relationship with the public sector. In our analysis of criminal trials, inquiries, testimonials, and examination of the Brazilian context, we attempt to demonstrate that good governance is related to the interaction of various types of institutions (cognitive, normative, and regulative), as well as embedded belief patterns shared in a society. For this purpose, we analyze the institutionalized patterns in a deviant environment and the competitive pressure in which enterprises are embedded. Furthermore, we examine internal organizational incentives and the profts from illegal practices, the hierarchical pressure, as well as the legitimation of unlawful activities, rationalization, and socialization in Brazilian organizations.

Relying on a multilevel analytical approach, we begin our analysis by describing the current Petrobras scandal and the main actors involved. Furthermore, we run our observations on the institutional level, and we analyze the change of regulations, laws, and the efforts of law enforcement agencies to investigate and prosecute corruption in Brazil. We aim to fnd out what kind of institutional and regulative changes were realized in Brazil and how the switch from defective to more effective regulations took place. In the next chapter, we argue that the defective regulation in the fght against corruption was one signifcant background and reason for the "normalization of corruption" on a corporate level. Dealing with the actors in charge of running the companies, we analyze how subcultures or social "cocoons" emerged inside the companies, providing frames of action for organizational wrongdoing. We ask whether and how so many high-ranking offcials and senior managers took part in the corrupt setup. One of the stunning facts revealed by Operation Carwash's investigators is how closely cartel building and bribe paying by important members of Brazil's big business was intertwined with illegal party fnancing and political corruption. We thus dedicate the sixth chapter to the analysis of political corruption in Brazil as the other side of the coin. Moving back to the actor level, we then ask how many and what kind of political actors have been involved and which

2According to the Freedom of Information Act, enacted in November 2011, all public agencies, members of the direct administration of the Executive, Legislative, including the Audit Courts and Judiciary and Public Prosecution as well as all municipalities, public foundations, state-owned enterprises, mixed-capital-companies and other entities directly or indirectly controlled by the Federal Government, States, Federal District and Municipalities must to divulge all information related to their administration, such as income and expenses as well as produced and guarded information that are of collective interest (http://www.planalto.gov.br/ccivil\_03/\_ ato2011-2014/2011/lei/l12527.htm).

framework of political wrongdoing has been established. Could Operation Carwash destroy the pattern of political corruption? In our subsequent conclusions, we will address whether the Brazilian case is just one of effective changes in law enforcement or a case of "good governance" as well.

#### **The Brazilian Petrobras Plot**

The Petrobras plot unveiled a complex and profound corruption scheme in Brazil. The number of political parties, enterprises, high-ranking politicians, executives, and managers as well as the sophisticated modus operandi discovered in the context of Operation Carwash was unprecedented in Brazilian society. The case's magnitude, but also the change in the methods and procedures applied on Operation Carwash, makes it a crucial case for social scientists.

Since Operation Carwash was launched in March 2014, its investigators have discovered US\$2 billion of bribery payments from private companies to Petrobras senior executives, politicians, and political parties. More than 760 cases are now in court, involving politicians, senior executives, owners of Brazil's largest enterprises, and other actors. 182 people have been convicted, penalties add up to 1809 years.3

To understand the Petrobras case, we shall pay attention to four core investigated groups. The frst core group consists of senior executives occupying key positions at three of Petrobras's business units: Supply, International, and Corporate and Services. Petrobras's executive directors, supported by political parties, ensured access to the expensive Petrobras contracts for a distinct group of Brazilian private construction companies. In return, the construction companies paid them somewhere between 1% and 3% on top of the contract's value. In this context, it is also important to account for the composition of the executive boards at Brazilian stateowned enterprises. Generally, the directors are appointed by government offcials, the President, and/or members of the political parties. In the case of Petrobras, the directors of the executive board were supported by political parties of the current ruling coalition: PT, PMDB, and PP (Progressive Party/Partido Progressista). The second main group in the Petrobras case was the so-called *black market dealers*. These intermediaries served as a link between Petrobras executives and managers of the construction companies, as well as between the government and party members. Furthermore, they were responsible for fnding means to launder the money from bribery payments. The third group involved in this bribery scheme consists of the largest Brazilian construction companies. They were organized in a cartel to obtain Petrobras's major public bids related to their business areas and allocate the contracts internally. The cartel dealt with Petrobras directors and makes it possible to restrict and exclude new bidders interested in Petrobras projects. Thanks to their "agreement" with Petrobras' senior managers, they ensured that the bid winner

3See http://www.mpf.mp.br/grandes-casos/lava-jato (accessed 23.02.2018).

always came from within the cartel. The fourth main group of suspects uncovered by Operation Carwash investigators is made up of politicians, government offcials, and political parties, in other words: the bribe takers.4 Leaders of political parties, politicians, such as state and federal deputies, senators, and ministers fnanced their political parties, campaigns, and political alliances through payment of bribes. Even the former republic President Michel Temer is suspected of receiving bribes from large enterprises,5 as was the former President Luiz Inacio Lula da Silva, who was sentenced to 12 years in prison.6

According to Petrobras's internal audit (Petrobras, 2014), perpetrators violated a series of the company's internal rules and general laws about public bids.7 The government has regulated public bids for hiring a service provider through strong legislation: Lei No. 8.666/1993. For the success of the bribery scheme, the participation of the business unit "Corporate and Services" was strategic, because its members were in charge of the bid procedures and regulations, project price calculation, as well as selection and accreditation of partner companies. The board of Corporate and Service alone could not approve new contracts, because the bid process demanded several business units, departments, and the monitoring of board members, but according to the former Petrobras president between 2012 and 2015, Maria das Graças Foster,8 the expertise and professional competence of the director of this unit was appreciated. In this respect, the business units' directors had a large scope to infuence or even "manipulate" the results of bid proceedings in favor of their interests.

4See trials for administrative improbity: 500662892.2<IP_ADDRESS>00/PR; 5006717-18.2<IP_ADDRESS>00/PR; 5006695-57.2<IP_ADDRESS>00/PR; 5006675-66.2<IP_ADDRESS>00/ PR; 5011119-11.2<IP_ADDRESS>00/PR; 5006694-72.2<IP_ADDRESS>00/PR; and criminal trials: 5083351-89.2<IP_ADDRESS>00/PR; 504524184.2<IP_ADDRESS>00/PR; 508325829.2<IP_ADDRESS>00/ PR; 5083401-18.2<IP_ADDRESS>00/PR; 5083376-05.2<IP_ADDRESS>00/PR; 503652823.2<IP_ADDRESS>00/ PR; 508336051.2<IP_ADDRESS>-000/PR; 501233104.2<IP_ADDRESS>00/PR; 507344138.2<IP_ADDRESS>00/ PR; 5027422-37.2<IP_ADDRESS>00/PR; 502698037.20-<IP_ADDRESS>00/PR).

5 Inquiry number 4.483/DF, documents 162339/2017/GTLJ-PGR and 162973/2017/GTLJ-PGR.

6Criminal trial 5046512-94.2<IP_ADDRESS>00/PR. The sentence and result of the appeal court decision has not yet been issued.

7Public bid is the set of laws to regulate the contracts between public and private sector, but also is used to administer contracts for purchasing materials and supplies by public entities. The public bid law aims to ensure that public entities receive the best possible price for the supplies or public works.

8Maria das Graças Foster's testimony https://www.youtube.com/watch?v=9TkDOJZlLOg

#### **Institutional and Regulative Changes in Brazil: From Defective to Effective Institutions and Regulations?**

On the institutional level, we are analyzing the changes in legislations and law enforcement over the last two decades, concerning political and economic corruption in Brazil. We are focusing mainly on the constitutional reality and the policy outcome, that is, on the effciency and effectiveness of law enforcement in Brazil. Not long ago, there was a lack of law enforcement and monitoring systems for private and public corruption (Chaves, 2013), creating an institutional environment prone to deviance and corruption. For example, Brazilian legislation does not yet cover private corruption9 (Pascolati Junior, 2016), some politicians have legal immunity, and thus, under the constitution, due this legal status they can be just investigated and prosecuted in special courts, such as the supreme court. According to the Carwash' prosecutors, although the penalties for corporate crime and political corruption have become more severe, the probability of being detected and incarcerated remained low (Dallagnol, 2017). What we call "defective institutions and defective regulations" have been part of the Brazilian reality concerning the fght against corruption.

In our discussion, we differentiate between institutions and regulations. We defne institutions as cognitive, normative, and regulative structures and/or activities that run on stability, but also constrain, regularize, and give meaning to social behavior, but assume an impersonal and objective form of reality (Scott, 2014). They incorporate both symbolic systems and regulative processes that orient social action and organizational behaviors in a defned social group and/or society (Bathelt & Glückler, 2014; Scott, 2014). Furthermore, institutions are determined by locality, cultural patterns, social conditions, etc., and constituted and reproduce by ongoing social interaction existing in a specifc social context (Glückler, Suddaby, & Lenz, 2018). "Although institutions may represent the intentions inherent in rules" (Bathelt & Glückler, 2014, p. 356), they differ from rules, laws and regulations. These can regulate social interaction from organizations and actors independently if those behind social beliefs or a common knowledge. In that sense, rules, laws and regulations can regulate social practice through their sanction systems (Bathelt & Glückler, 2014). Thus, introduced laws, rules and regulations can lead to different outcomes, depending the existing institutions, with them the new regulation will be interact (Glückler & Lenz, 2016).

Institutions and regulations are defective when laws and directives, such as anticorruption laws, do exist but these either fail to set suffcient standards or the administrative enforcement thereof is patchy or inadequately guaranteed. In this case, the constitutional legal bases are not undermined, but the purpose of the regulation is largely missed. The fght against corruption may be only "nice to have," as one has

9Bill 236/2012 has been in process since 2012 in the Brazilian Federal Senate to implement the penal legislation with legal instrument to defne and punish private corruption (Pascolati Junior, 2016, p. 148).

repeatedly witnessed over the past years. We believe that such a defective regulation creates important preconditions for the emergence of forms of deviant self-regulation at the level of enterprises. And that is exactly what happened in the case of the fght against corruption in Brazil. Defective regulations and institutions are, in this sense, functional for the maintenance of a system that systematically and legally subverts the purposes of statutory regulation. We call this "systemic corruption."

In the 1990s, the global diffusion of regulatory agencies (Braithwaite, 2008; de Rugy & Warren, 2009; Jordana, Levi-Faur, & Fernández i Marín, 2011) also spread to Brazil, a country which a long-lasting tradition of a regulatory state and regulatory capitalism (Braithwaite, 2008). Although impeded by a self-sustaining pattern of cronyism, a new phase of regulation emerged in Brazil as well, leading to the detection and prosecution of big corruption scandals. In the last decades, Brazil has committed itself, through several international agreements,10 to fghting against corruption (Barkemeyer, Preuss, & Lee, 2015; Dantas de Araujo, 2012; de Sanctis, 2015; Richard, 2014). To do so, Brazil has implemented a national strategy against corruption, organized crime, and money laundering, the National Strategy for Combating Corruption and Money Laundering (Estratégia Nacional contra a Corrupção e a Lavagem de Dinheiro (ENCCLA)) (de Sanctis, 2015). This initiative is not only a new paradigm to combat corruption and economic and fnancial crimes, but it is also responsible for concrete changes aimed at involving the judicial system more strongly in the execution and investigation of corruption cases. The new Anti-Corruption Act n. 12.846/2013 is a result of the support of the ENCCLA's strategies. Its signifcant change consists in the accountability and punishment of Brazilian and foreign companies as legal entities. They can be addressed by the penal code and have obligations to install compliance systems (Chaves, 2013; Correia, 2015; Wohlnick & Correia, 2016).

The diffusion of international anticorruption policies in Brazil has fomented a series of changes related to new regulation, such as enacting of laws and rules to regulate and control the public administration and to generate more transparency of public spending and public activities (Lei No. 8.112/1990; Lei No. 8.429/1992; Lei Complementar No. 101/2000; Lei Complementar No. 131/2009; Lei No. 12.527/2011), the business relation between the public and private sector (Lei No. 8.666/1993; Lei No. 10.520/2002), and so forth. (Filgueiras & Araújo, 2014). Some authors have also pointed to changes related to the perception of Brazilian society about corruption. With the redemocratization process, the corruption scandals have also become public. Most recent changes on the institutional level in Brazil related to laws and regulations, such as the Anti-Corruption Act, may be the product of civil society pressure (Filgueiras & Araújo, 2014). Even if the perception about corruption in Brazilian society over time seems to be changing, small and large corruption is still affecting the relation between actors, organizations, and government.

10United Nations Convention against Transnational Organized Crime; Convention on Combating Bribery of Foreign Public Offces in International Business Transactions (OECD); Convention on Combating Bribery (UK) (2003); United Nations Convention against Corruption (Mérida Convencion); Inter-American Convention against Corruption; and so forth.

The regulative changes have been impressive and well acknowledged all over the world as good governance in the fght against corruption. Yet it is more precise to call it "good law enforcement" and to keep open whether it leads to a mode of good governance, in which various interest groups and societal actors engage in the fght against corruption.

#### **The "Normalization of Corruption" on a Corporate Level**

In our view, defective regulations in the fght against corruption are one important precondition for the "normalization of corruption" on a corporate level. By analyzing the cartel of construction companies, we discovered that only 30% of these enterprises had a code of conduct to regulate the business relations in- and outside of the company before Operation Carwash began. Our analysis revealed that although these enterprises do have a code of conduct, the terms and clauses prescribing rules of doing business ethically and those declaring illegal and unlawful behavior to be punishable are phrased vaguely. Furthermore, in the code of conduct was lacking a precise description of no acceptable practices and behaviors inside of the organization, in its relationship with the political feld and with other enterprises as well as a concretely description of sanctions and penalties against the wrongdoers was missing. Thus, in the code of conduct, this is considered a frst step to establishing a compliance system. Most of the companies under investigation by the Operation Carwash had no compliance measures installed. They only started to establish a compliance system when they moved into the spotlight of law enforcement. Only those companies with major business activities abroad or with international investors ran an internal compliance system. However, lawyers and compliance professionals have strongly challenged the legitimacy and effectiveness of the internal compliance (Pizarro, 2015). If we extend our analysis beyond Brazil to the Latin America context, we verify that the introduction of compliance systems to regulate corporate behaviors are a relatively young practice in Latin American countries. According to Passas and Kleinhempel (2016), although 35% of the existing compliance systems were introduced between 2005 and 2010, more than 50% were implemented in the last few years. These authors have pointed out that there is a gap in employee awareness about the importance of such programs. An average of 19% of employees did not know about the introduction of a compliance program in their company (p. 82).

Far more important is that companies like Odebrecht ran departments dedicated to carrying out illicit activities, such as the department Odebrecht called "departamento de operações estruturadas" (department for structured operations) which had existed for decades. According to the former senior manager Hilberto Mascarenhas, the chief offcer of Odebrecht's "departamento de operações estruturadas," the company had also established an internal bonus system that provided incentives for paying bribes. In his case, the annual bonus was as high as one third of his annual salary of US\$1.2 million and was part of a provision system for bribe payers.

What was agreed was this: I will pay you a bonus on the basis of your outcomes. And we will negotiate it annually. So, you may do anything that you need to achieve it [bonus]. So if you ask someone who wants to increase the revenue of his project, but this requires the approval of an 'aditivo' [additional investments] that is still on the table of someone who does not want to approve of it, this person may do everything for the approval of his 'aditivo' to increase the value of his project. (Hilberto Mascarenhas, Odebrecht former senior manager, 2017 testimony11)

Moreover, the paid bribes were subtracted from individual bonuses gained through the project, so that the responsible manager had autonomy to fx the sum of the bribe. The existence of a permissive code of conduct and the lack of a working compliance system that may prevent the unlawful activities inside of the organization, therefore, were both elements that gave rise to internal incentives for resorting to illegal practices; both contributed to the establishment of an organizational culture in which such practices were accepted and normalized. In their testimonies, the executives displayed a self-image as professionals that achieved sound performances. In other words, "they did their job."

Of course, by now all these companies have changed their policies concerning the illicit dimensions of their business activities. The "departamentos de operações estruturadas" have been wound up, and the bonus systems terminated. The company Odebrecht repented by running apologies in the print media for its wrongdoing.12

#### **The Corporate Level Actors: Entrepreneurs and Top Managers**