What is the Kyoto Protocol?
What is the ‘cap and trade’ system?
How do the ‘flexible mechanisms’ work?
International Emissions Trading
Joint Implementation (JI)
Clean Development Mechanism (CDM)
Can the ‘cap and trade’ concept be applied within a country?
What is the EU Emissions Trading Scheme (EU-ETS)?
What is the difference between emissions trading in a ‘cap and trade’ scheme and emissions trading in the voluntary offset market?
What does additionality mean and why is it important?
What is the Kyoto Protocol?
The Kyoto Protocol is an addendum to the United Nations Framework Convention on Climate Change. It was signed in 1997 and came into force in 2006. The Protocol contains legally binding commitments for the reduction of greenhouse gas emissions by developed countries that have ratified it.
What is the ‘cap and trade’ system?
In the context of the Kyoto Protocol a national cap is a limit, or ceiling on greenhouse gas emissions, called an Assigned Amount. Countries that have agreed to reduce their greenhouse gas emissions under the Kyoto Protocol are legally bound to stay below their caps. However, they may exceed this limit if they purchase compensating units of emissions reductions, called carbon credits, from approved sources elsewhere in the world. Thus, although Kyoto requires developed countries to cap their greenhouse gas emissions, it allows them to trade emissions reductions in a variety of ways.
How do the ‘flexible’ mechanisms work?
Besides reducing emissions domestically, countries can also use one of the flexible mechanisms established by the Kyoto Protocol to meet part of their emissions reduction commitments. These mechanisms are:
International Emissions Trading. Emissions trading permits developed countries that expect to reduce emissions more than required to sell Assigned Amount Units equal to one tonne of carbon dioxide equivalent per unit, to other developed countries that expect to have difficulty meeting their Kyoto targets. Under the Green Investment Scheme, the selling country commits to use the revenues for investment in environmentally friendly projects, including carbon offset projects.
Joint Implementation (JI). Joint Implementation permits a country with Kyoto obligations to invest in a joint venture project for emissions-reductions in another country with a cap, on condition that neither country would be able to implement the project on its own, and that the emission reduction units (ERUs) attributable to its investment are accounted as its own reduction and not that of the host country.
Clean Development Mechanism (CDM). The Clean Development Mechanism promotes investment in carbon offset and above-ground carbon sequestration projects in countries with no caps. The Certified Emissions Reductions (CER) that these projects generate must be additional to the ‘ business-as-usual’ situation, and the projects should contribute to the sustainable development objectives of the host country. CDM CER are sold to developed countries with emissions caps on the compliance offset market.
Can the ‘cap and trade’ concept be applied within a country?
Yes it can. The provisions of the Kyoto protocol only apply to countries. However, countries are free to defer some of the responsibility to reduce emissions to domestic actors, such as businesses. In this case, the countries set caps and allocate emission rights that domestic businesses can trade among themselves. If one business knows in advance that it risks exceeding its limit, it can arrange to buy emissions allowances from another business that has managed to stay under its limit. Like countries, businesses can invest in new emissions reduction activities to help stay within their limits.
What is the EU Emissions Trading Scheme (ETS)?
The EU ETS is a group of EU member states that have joined together under a cap-and-trade scheme for their industries that limits emissions from the most-emitting of them and then allows these industries to buy emissions reductions from willing sellers. It is the largest mandatory cap-and-trade scheme to date, with the goal of helping EU countries to meet their Kyoto commitments.
What is the difference between emissions trading in a ‘cap and trade’ scheme and emissions trading in the voluntary offset market?
Cap-and-trade schemes offer countries and businesses the possibility to take advantage of competitive market opportunities to reduce future greenhouse gas emissions and meet Kyoto targets. Prior to ratification of the Kyoto Protocol, voluntary offset markets developed to give both public and private sector entities of all kinds the opportunity to begin immediately to invest in emission reduction projects that would offset some or all of their current emissions. Since the Protocol came into force in 2006, countries have switched their emissions trading activities from the voluntary market to the cap-and-trade schemes and flexible-mechanism markets of Kyoto. However, numerous private entities still trade in the voluntary offset market.
What does additionality mean and why is it important?
Additionality is the defining concept of carbon offset projects. To qualify as an offset, the reductions achieved by a project need to be additional to what would have happened if the project had not been carried out. Otherwise, the emissions reduction activities will not lead to a net reduction in the rate of greenhouse gas accumulation. Carbon offset projects also need to use revenue generated from the sale of carbon credits to finance their productive activities, and avoid diversion of funds from other planned development investments.