Kyoto Protocol
The Kyoto Protocol is a legally binding agreement under which industrialized countries will reduce their collective emissions of greenhouse gases by 5.2% compared to the year 1990 (but note that, compared to the emissions levels that would be expected by 2010 without the Protocol, this target represents a 29% cut). The goal is to lower overall emissions from six greenhouse gases - carbon dioxide, methane, nitrous oxide, sulfur hexafluoride, HFCs, and PFCs - calculated as an average over the five-year period of 2008-12. National targets range from 8% reductions for the European Union and some others to 7% for the US, 6% for Japan, 0% for Russia, and permitted increases of 8% for Australia and 10% for Iceland.
The mechanism was formalized in the Kyoto Protocol, an international agreement between 180 countries, and the market mechanisms were agreed through the subsequent Marrakesh Accords. The mechanism adopted was similar to the successful US Acid Rain Program to reduce some industrial pollutants.
The carbon trade is an idea that came about in response to the Kyoto Protocol. Signed in Kyoto, Japan, by some 180 countries in December 1997, the Kyoto Protocol calls for 38 industrialized countries to reduce their greenhouse gas (GHG) emissions between the years 2008 to 2012 to levels that are 5.2% lower than those of 1990. The idea behind carbon trading is quite similar to the trading of securities or commodities in a marketplace. Carbon would be given an economic value, allowing people, companies, or nations to trade it. If a nation bought carbon, it would be buying the rights to burn it, and a nation selling carbon would be giving up its rights to burn it. The value of the carbon would be based on the ability of the country owning the carbon to store it or to prevent it from being released into the atmosphere. (The better you are at storing it, the more you can charge for it.)
Carbon credits fully fungible (trade-able) financial instruments, and are measured in tons of carbon dioxide equivalent (tons CO2e).
There are four types:
• EUAs: European Union Allowances are issued freely by the EU for several years at one go, for use within the Emission Trading Scheme (EU ETS). The ETS second phase began Jan 1 2008 and ends Dec 31 2012. All second phase EUA must be used within that period.
• CERs: Certified Emission Reductions are issued by the UNFCCC for demonstrable reductions of greenhouse gas emissions in Clean Development Mechanism (CDM) Projects under Article 12 of the Kyoto Protocol.
• ERUs: Emission Reduction Units are credits created under Article 6 of the Kyoto Protocol, Joint Implementation (JI).
• VERs: Verified Emission Reductions are issued by independent bodies for demonstrable reductions of greenhouse gas emissions in projects that, for whatever reason, fall outside of the CDM. Their standards may be just as strict (such as with the Voluntary Carbon Standard (VCS) Gold Standard), or not as stringent. However the market will generally reflect a poorer price for a VER that has been issued to a low or difficult to verify standard.
