Archive for June, 2009

Kyoto Protocol/Government Action
June 3, 2009

The Kyoto Protocol is a protocol to the United Nations Framework Convention on Climate Change (UNFCCC or FCCC), an international environmental treaty produced at the United Nations Conference on treaty is intended to achieve “stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system.”[1] The Kyoto Protocol establishes legally binding commitments for the reduction of four greenhouse gases (carbon dioxide, methane, nitrous oxide, sulphur hexafluoride), and two groups of gases (hydrofluorocarbons and perfluorocarbons) produced by “Annex I” (industrialized) nations, as well as general commitments for all member countries. As of January 2009, 183 parties have ratified the protocol,[2] which was initially adopted for use on 11 December 1997 in Kyoto, Japan and which entered into force on 16 February 2005. Under Kyoto, industrialized countries agreed to reduce their collective GHG emissions by 5.2% compared to the year 1990. National limitations range from 8% reductions for the European Union and some others to 7% for the United States, 6% for Japan, and 0% for Russia. The treaty permitted GHG emission increases of 8% for Australia and 10% for Iceland.[3]

Kyoto includes defined “flexible mechanisms” such as Emissions Trading, the Clean Development Mechanism and Joint Implementation to allow Annex I economies to meet their greenhouse gas (GHG) emission limitations by purchasing GHG emission reductions credits from elsewhere, through financial exchanges, projects that reduce emissions in non-Annex I economies, from other Annex I countries, or from Annex I countries with excess allowances. In practice this means that Non-Annex I economies have no GHG emission restrictions, but have financial incentives to develop GHG emission reduction projects to receive “carbon credits” that can then be sold to Annex I buyers, encouraging sustainable development.[4] In addition, the flexible mechanisms allow Annex I nations with efficient, low GHG-emitting industries, and high prevailing environmental standards to purchase carbon credits on the world market instead of reducing greenhouse gas emissions domestically. Annex I entities typically will want to acquire carbon credits as cheaply as possible, while Non-Annex I entities want to maximize the value of carbon credits generated from their domestic Greenhouse Gas Projects.

Among the Annex I signatories, all nations have established Designated National Authorities to manage their greenhouse gas portfolios; countries including Japan, Canada, Italy, the Netherlands, Germany, France, Spain and others are actively promoting government carbon funds, supporting multilateral carbon funds intent on purchasing Carbon Credits from Non-Annex I countries,[citation needed] and are working closely with their major utility, energy, oil & gas and chemicals conglomerates to acquire Greenhouse Gas Certificates as cheaply as possible.[citation needed] Virtually all of the non-Annex I countries have also established Designated National Authorities to manage the Kyoto process, specifically the “CDM process” that determines which GHG Projects they wish to propose for accreditation by the CDM Executive Board.




The objective is the “stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system.”[1]

The objective of the Kyoto climate-change conference was to establish a legally binding international agreement, whereby, all the participating nations commit themselves to tackling the issue of global warming and reduce greenhouse gas emissions. The target agreed upon at the summit was an average reduction of 5.20n 1990 levels by the year 2012.

The Intergovernmental Panel on Climate Change (IPCC) has predicted an average global rise in temperature of 1.4°C (2.5°F) to 5.8°C (10.4°F) between 1990 and 2100.[5]

Proponents also note that Kyoto it is a first step[6][7] as requirements to meet the UNFCCC will be modified until the objective is met, as required by UNFCCC Article 4.2(d).[8]

The treaty was negotiated in Kyoto, Japan in December 1997, opened for signature on 16 March 1998, and closed on 15 March 1999. The agreement came into force on 16 February 2005 following ratification by Russia on 18 November 2004. As of 14 January 2009, a total of 183 countries and 1 regional economic integration organization (the EC) have ratified the agreement (representing over 63.7% of emissions from Annex I countries).[2]

According to article 25 of the protocol, it enters into force “on the ninetieth day after the date on which not less than 55 Parties to the Convention, incorporating Parties included in Annex I which accounted in total for at least 55% of the total carbon dioxide emissions for 1990 of the Parties included in Annex I, have deposited their instruments of ratification, acceptance, approval or accession.” Of the two conditions, the “55 parties” clause was reached on 23 May 2002 when Iceland ratified. The ratification by Russia on 18 November 2004 satisfied the “55%” clause and brought the treaty into force, effective 16 February 2005. Australian Prime Minister Kevin Rudd ratified the Kyoto protocol on 3 December 2007. This came into effect after 90 days (the end of March 2008), as is stated in the guidelines set by the United Nations.


Emissions trading

Main article: Emissions trading

Kyoto is a ‘cap and trade’ system that imposes national caps on the emissions of Annex I countries. On average, this cap requires countries to reduce their emissions 5.2% below their 1990 baseline over the 2008 to 2012 period. Although these caps are national-level commitments, in practice most countries will devolve their emissions targets to individual industrial entities, such as a power plant or paper factory. One example of a ‘cap and trade’ system is the ‘EU ETS‘. Other schemes may follow suit in time.

This means that the ultimate buyers of credits are often individual companies that expect their emissions to exceed their quota (their Assigned Allocation Units, AAUs or ‘allowances’ for short). Typically, they will purchase credits directly from another party with excess allowances, from a broker, from a JI/CDM developer, or on an exchange.

National governments, some of whom may not have devolved responsibility for meeting Kyoto obligations to industry, and that have a net deficit of allowances, will buy credits for their own account, mainly from JI/CDM developers. These deals are occasionally done directly through a national fund or agency, as in the case of the Dutch government’s ERUPT programme, or via collective funds such as the World Bank’s Prototype Carbon Fund (PCF). The PCF, for example, represents a consortium of six governments and 17 major utility and energy companies on whose behalf it purchases credits.

Since allowances and carbon credits are tradeable instruments with a transparent price, financial investors can buy them on the spot market for speculation purposes, or link them to futures contracts. A high volume of trading in this secondary market helps price discovery and liquidity, and in this way helps to keep down costs and set a clear price signal in CO2 which helps businesses to plan investments. This market has grown substantially, with banks, brokers, funds, arbitrageurs and private traders now participating in a market valued at about $60 billion in 2007.[11] Emissions Trading PLC, for example, was floated on the London Stock Exchange‘s AIM market in 2005 with the specific remit of investing in emissions instruments.

Although Kyoto created a framework and a set of rules for a global carbon market, there are in practice several distinct schemes or markets in operation today, with varying degrees of linkages among them.

Kyoto enables a group of several Annex I countries to join together to create a market-within-a-market. The EU elected to be treated as such a group, and created the EU Emissions Trading Scheme (ETS). The EU ETS uses EAUs (EU Allowance Units), each equivalent to a Kyoto AAU. The scheme went into operation on 1 January 2005, although a forward market has existed since 2003.

The UK established its own learning-by-doing voluntary scheme, the UK ETS, which ran from 2002 through 2006. This market existed alongside the EU’s scheme, and participants in the UK scheme have the option of applying to opt out of the first phase of the EU ETS, which lasts through 2007[citation needed].

The sources of Kyoto credits are the Clean Development Mechanism (CDM) and Joint Implementation (JI) projects. The CDM allows the creation of new carbon credits by developing emission reduction projects in Non-Annex I countries, while JI allows project-specific credits to be converted from existing credits within Annex I countries. CDM projects produce Certified Emission Reductions (CERs), and JI projects produce Emission Reduction Units (ERUs), each equivalent to one AAU. Kyoto CERs are also accepted for meeting EU ETS obligations, and ERUs will become similarly valid from 2008 for meeting ETS obligations (although individual countries may choose to limit the number and source of CER/JIs they will allow for compliance purposes starting from 2008). CERs/ERUs are overwhelmingly bought from project developers by funds or individual entities, rather than being exchange-traded like allowances.

Since the creation of Kyoto instruments is subject to a lengthy process of registration and certification by the UNFCCC, and the projects themselves require several years to develop, this market is at this point largely a forward market where purchases are made at a discount to their equivalent currency, the EUA, and are almost always subject to certification and delivery (although up-front payments are sometimes made). According to IETA, the market value of CDM/JI credits transacted in 2004 was EUR 245 m; it is estimated that more than EUR 620 m worth of credits were transacted in 2005.

Several non-Kyoto carbon markets are in existence or being planned, and these are likely to grow in importance and numbers in the coming years. These include the New South Wales Greenhouse Gas Abatement Scheme, the Regional Greenhouse Gas Initiative and Western Climate Initiative in the United States and Canada, the Chicago Climate Exchange and the State of California’s recent initiative to reduce emissions.

These initiatives, taken together may create a series of partly-linked markets, rather than a single carbon market. The common theme across most of them is the adoption of market-based mechanisms centered on carbon credits that represent a reduction of CO2 emissions. The fact that some of these initiatives have similar approaches to certifying their credits makes it conceivable that carbon credits in one market may in the long run be tradeable in other schemes. This would broaden the current carbon market far more than the current focus on the CDM/JI and EU ETS domains. An obvious precondition, however, is a realignment of penalties and fines to similar levels,since these create an effective ceiling for each market.




The protocol left several issues open to be decided later by the sixth Conference of Parties (COP). COP6 attempted to resolve these issues at its meeting in the Hague in late 2000, but was unable to reach an agreement due to disputes between the European Union on the one hand (which favoured a tougher agreement) and the United States, Canada, Japan and Australia on the other (which wanted the agreement to be less demanding and more flexible).

In 2001, a continuation of the previous meeting (COP6bis) was held in Bonn where the required decisions were adopted. After some concessions, the supporters of the protocol (led by the European Union) managed to get Japan and Russia in as well by allowing more use of carbon dioxide sinks.

COP7 was held from 29 October 2001 through 9 November 2001 in Marrakech to establish the final details of the protocol.

The first Meeting of the Parties to the Kyoto Protocol (MOP1) was held in Montreal from 28 November to 9 December 2005, along with the 11th conference of the Parties to the UNFCCC (COP11). See United Nations Climate Change Conference.

The 3 December 2007, Australia ratified the protocol during the first day of the COP13 in Bali.

Of the signatories, 36 developed C.G. countries (plus the EU as a party in the European Union)agreed to a 10% emissions increase for Iceland; but, since the EU’s member states each have individual obligations,[12] much larger increases (up to 27%) are allowed for some of the less developed EU countries (see below #Increase in greenhouse gas emission since 1990).[13] Reduction limitations expire in 2013.




If the Enforcement Branch determines that an Annex I country is not in compliance with its emissions limitation, then that country is required to make up the difference plus an additional 30%. In addition, that country will be suspended from making transfers under an emissions trading program.[14]