Kyoto Protocol

The Kyoto Protocol formed under the United Nation Framework Convention on Climate Change (UNFCCC) allows the Annex I countries of the UNFCCC (the developed countries and countries with economies in transition) to reduce their greenhouse gas (GHG) emissions by a certain amount. The Protocol was formed in 1997 and it came into force on 16th Feb 2005. This is a legally binding agreement for 169 industrialized nations to collectively reduce their GHG emissions to about 5 % from 1990 levels. The 1990 emission levels have been taken as baseline. In the 2008-2012 phase of the Kyoto, the legally bound countries will achieve their targets. The six GHG gases identified in the Protocol are CO2, CH4, HFC, PFC, SF6 and N2O. It is under the Kyoto regime that the largest GHG market in the world has evolved.

There are three mechanisms under the Protocol through which the Annex I countries can reduce their emissions. These mechanisms form the foundation of the Kyoto Protocol. They are as follows:
• Clean Development Mechanism
• Joint Implementation
• Emissions Trading

These mechanisms allow such countries to reduce their emissions by funding/implementing project activities that reduce the GHG emissions in other countries. The rationale behind having such flexible mechanisms is that climate change is a global phenomenon and carbon dioxide reduced at one place will have a net positive impact in GHG reductions across the globe.

Clean Development Mechanism, defined under Article 12 of the Kyoto Protocol, is a project based transaction system which allows industrialized nations, having a target for reduction of GHG, to accrue carbon credits. A CDM project should assist Non Annex Party/country (developing nations) in achieving sustainable development. Projects such as energy efficiency, fuel switch, renewable energy (hydro power, wind power), methane capture from municipal solid waste, waste to energy, HFC destruction, biomass and cogeneration, which help in reduction of GHG emissions could be potential CDM projects. Carbon credits are acquired by financing the carbon reduction projects in developing nations. The credits originating from such projects are termed as Certified Emission Reductions (CERs). For every tonne of carbon dioxide reduced, one CER is issued which is then traded in the international market such as the EU ETS. The CERs can also be sold in the voluntary carbon market. In 2006, the CDM transacted credits valued at around US $5 billion and represented reductions of 450 Mt CO2e. (provide link to Carbon advisory)

Joint Implementation allows emitters in the developed (Annex I) countries to purchase carbon credits from another developed country or an economy in transition that have implemented carbon reduction projects. This is also a project based transaction and reductions achieved through such projects are referred to as Emission Reduction Units (ERUs). Some of the countries involved in JI are Austria, Belgium, Canada, Denmark, Finland, Italy, Japan, Poland, Romania, Spain, UK, etc. Any project starting after the 1st January 2002 is eligible to be a part of JI.

Emission Trading is an allowance based transaction system which permits Annex I countries to purchase carbon credits from other Annex I countries to fulfill their emission reductions commitments. The European Union Emission Trading Scheme (EU ETS) is a resultant of this mechanism and is currently the world’s largest multi-national GHG trading scheme. Credits under this system are known as European Union Allowances (EUAs). You can click here to check the buy-sell opportunities.