Kyoto Protocol

The Kyoto Protocol established emission targets for industrialized countries.7 The overall target set by the Protocol is for these countries to reduce emissions of greenhouse gases (CO2, CH4, N2O, HFCs, PFCs, SF6) by over 5% below 1990 levels by the commitment period 2008-2012.8 With the U.S. refusing to ratify the Protocol and provisions for Russia and others to count additional carbon sequestration towards their target rather than reducing emissions, the overall target is now considered to be much less.9 To achieve this overall reduction, each industrialized country has a national emissions target which is an 'assigned amount' based on its agreed percentage reduction (or an increase in some cases) from 1990 levels.

The Kyoto Protocol and other decisions agreed at the international climate change negotiations have established a framework for international emissions trading in order to reduce the costs of achieving the Kyoto targets.10 The unit of trade is metric tonnes of CO2 equivalent." A country that expects not to need its entire assigned amount to cover actual emissions over the period 2008-2012 can sell to countries which face high costs to limit emissions to their target level. Any greenhouse gas permits that are not needed to cover emissions in the period they were issued will remain valid for future periods until they are used (i.e. banking is allowed from one commitment period to the next). Exactly as in the illustration in Figure 1, but with countries rather than companies as the traders, international trade in national assigned amounts alters the national targets established in the Kyoto Protocol against which countries will be assessed for compliance in 2012.

However, emissions trading is not strictly limited to the countries that have national targets. Additional assigned amounts can be purchased from outside

6 The Kyoto Protocol to the United Nations Framework Convention on Climate Change is the international climate change treaty agreed in Kyoto, Japan in 1997. Full text is available at www.unfccc.int.

7 These are countries listed in Annex I of the Kyoto Protocol and include most OECD countries and central and eastern European countries that are in the process of transition to a market economy.

8 Annex I parties' commitments are defined as a basket of six greenhouse gases, which implies that international emissions trading among governments will include all six gases. A weighting index of 100-year global warming potentials (GWPs) will be used to translate greenhouse gases into CO2 equivalent units for trading. See Kyoto Protocol text at www.unfccc.int.

9 See, for example, C. Vrolijk, Quantifying the Kyoto Protocol Commitments and Mechanisms, RECIEL, 2001, 9, 283-293.

10 The results of different modelling exercises on the costs of meeting the Kyoto targets with and without emissions trading are reviewed in J. Weyant (ed.), The costs of the Kyoto Protocol: a multi-model evaluation, Energy J. Special Issue, International Association for Energy Economics, 1999.

11 A weighting index of 100-year global warming potentials (GWPs) will be used to translate greenhouse gases into CO2 equivalent units for trading; see ref. 8.

the group of countries that have emission targets by purchasing emission reductions from developing countries.12 Thus industrialized countries have a licence to emit a certain level of CO2 equivalent emissions, with the overall target defined under the Kyoto Protocol (and subsequent decisions). However, the overall level of emissions in developed countries can expand beyond the aggregated Kyoto target level to the extent that certified emission reductions occur in developing countries under the Clean Development Mechanism.13 The global environmental objective is in theory ensured, but in practice there is potential for certifying emission reductions from developing countries that are not additional to what would have occurred in any case. If this happens, developing country development may be helped by the finance from the industrialized countries, but the environmental objective set at Kyoto will not be met. This type of added complexity, even with the most laudable intentions, increases the chance that the emissions trading that results from the Kyoto Protocol could be a licence to pollute beyond the politically agreed levels.

The present targets for greenhouse gas emissions in industrialized countries for 2008-2012 are not particularly tough for most countries. Some large countries that are in the process of transition to a market economy, such as Russia, have Kyoto targets that give them a national limit on emissions that far exceeds what their actual emissions will reach. Several countries have generous provisions for using sequestration to meet their targets. This is indeed a 'licence to pollute' that is likely to enable global emissions to increase further than they would if Russia were not able to engage in emissions trading and sequestration provisions were tougher. Arguably, however, even the relatively easy targets agreed at Kyoto could not have been achieved without this leniency for Russia, compromise on sequestration and provisions for emissions trading.14

If low carbon prices do emerge through international emissions trading, it will be a clear sign that the targets are relatively easy to meet. Achieving stabilization of greenhouse gases in the atmosphere at safe levels will require much tougher targets of more than 60% reduction from 1990 levels over the next 50-100 years. 15 Already informal discussions are beginning on what the targets should be after 2012. The price signal from international emissions trading will help to inform this negotiation.

12 These developing country reductions must be independently validated and certified according to the rules of the Kyoto Protocol's 'Clean Development Mechanism', which aims to provide finance for developing country sustainable production by allowing industrialized countries to use these reductions towards meeting their national emission targets.

13 The Clean Development Mechanism enables developing countries to attract investment for clean energy and other measures that reduce greenhouse gas emissions. They sell their emission reductions to industrialized countries that have Kyoto targets. The Kyoto Protocol allows industrialized countries to use developing country emission reductions to meet their Kyoto targets.

14 M. Grubb, C. Vrolijk and D. Brack, The Kyoto Protocol: A Guide and Assessment, RIIA/Earthscan, June 1999.

15 B. Metz, O. Davidson, R. Swart and J. Pan, Climate Change 2001: Mitigation, contribution of Working Group III to the Third Assessment Report of the Intergovernmental Panel on Climate Change, IPCC 2001, p. 134. Figure 2.6 illustrates results from a broad range of models showing global CO2 reductions required for 550 parts per million concentrations of CO2 in the atmosphere.

Many industrialized country governments will devolve the responsibility for reducing emissions to companies, and companies are likely to be the main participants in both national and international emissions trading if their governments allow this. Examples of the use of emissions trading at the national and regional levels are discussed next.

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