Carbon trading started as part of a UN international treaty on climate change. The objective was to "...achieve stabilization of greenhouse concentrations in the atmosphere at a level that would prevent dangerous anthropogenic (human) interference with the climate system." http://unfccc.int/essential_background/convention/background/items/1353.php It was drawn up during the Convention on Climate Change by the Conference of Parties 3 (C.o.P. 3) in 1997 in the city of Kyoto, Japan. It is also known as the Kyoto Protocols. The participating countries committed themselves to tackle climate change due to emissions of green house gases or GHG.
The Kyoto Protocol (KP), initially, set binding targets for reducing the emissions of these gases in the atmosphere. Governments who signed the KP agreed to reduce and put a limit on the amount of green house gases they were emitting. Each country has a central authority that assigns quotas or credits or emissions permits to those entities that emit greenhouse gases within that country (companies, individuals, NGOs, etc.) and must ensure that its emissions do not exceed its assigned amount. The maximum amount a country can emit to comply with its emissions target is known as the "assigned amount" http://unfccc.int/kyoto_protocol/items/3145.php — the number of metric tons of greenhouse gases that may be emitted by sources within the country during the five-year commitment period running from 2008 through 2012.
The Kyoto Protocol became effective in February 2005. It is underwritten by governments and is governed by the UN. As of December 3, 2009 190 countries and the European Union have ratified, approved or accepted the protocol.
Details
To achieve its objectives the Kyoto Protocol outlined the following three "flexible mechanisms":
1) Emission Trading (ET)
One of the provisions in the Kyoto Protocol called for is the creation of a market-based mechanism for international emission trading. This allows countries whose emissions are less than their assigned amount to sell the excess unused amount to countries whose emissions have exceeded their assigned amount thus allowing them to meet their reduction obligations. In this context assigned amounts can be thought of as a tradable allowances, or commodity, and the free market mechanisms is known as the "carbon market."
2) Clean Development Mechanism (CDM)
The CDM allows a developed country to implement emission reduction projects in developing countries that did not sign the KP. It is aimed at reducing greenhouse gas emissions. Examples of projects are wind farms, solar arrays, tree planting and other green energy projects.
In exchange for funding these projects developed countries get legally recognized emission credits called CERs (certified emission reduction.) These credits can be used to offset their emission obligations. A benefit of this market-based mechanism is that it allows the transfer of clean and modern technology to developing countries while giving developed countries another option in how to meet their emission commitments. That is, by implementing emission reduction projects in countries where it's relatively inexpensive to do so, thereby cutting costs. It doesn't matter where in the world the reductions take place since emissions have no boundaries and the less enter the atmosphere the better it is. Once issued, credits can be used to fulfill obligations imposed by the KP, or can be sold on the market. unfccc.int/kyoto_protocol/mechanisms/clean_development_mechanism/items/2718.php>
3) Joint implementation (JI)
The JI is the mechanism by which a developed country can implement emission reduction projects in another developed or developing country and get credits, called Emission Reduction Units (ERUs) that can be used meet their allowance or can be sold on the market. Similar to CDM, it allows funding of emission reduction projects in countries who signed the Kyoto Protocol.
unfccc.int/essential_background/convention/background/items/2536.php
The Kyoto Protocol covers emissions of the six main greenhouse gases, namely:
- Carbon dioxide (CO2) - Fossil fuel combustion, forest clearing, cement production, etc.
- Methane (CH4) - Landfills, production and distribution of natural gas & petroleum, fermentation from the digestive system of livestock, rice cultivation, fossil fuel combustion, etc.
- Nitrous oxide (N2O) - Fossil fuel combustion, fertilizers, nylon production, manure, etc.
- Hydrofluorocarbons (HFCs) - Refrigeration gases, aluminum smelting, semiconductor manufacturing, etc.
- Perfluorocarbons (PFCs) - Aluminum production, semiconductor industry, etc.
- Sulphur hexafluoride (SF6) - Electrical transmissions and distribution systems, circuit breakers, magnesium production, etc.
The Voluntary Market:
In addition to the regulated market described above there is also a voluntary markets. The voluntary markets function outside of the regulated market and its participants are not subject to any regulations. Not all countries have committed to the emission reduction framework set forth by the Kyoto Protocol. One of the reasons is that these countries are not sure how to simultaneously achieve reductions and grow their economies. The US has not ratified the treaty. President George W. Bush pulled out of the Kyoto Protocol in 2001, saying implementing it would gravely damage the US economy. news.bbc.co.uk/2/hi/science/nature/4269921.stm> Other major countries not part of the Kyoto Protocol are China and India. However, these countries do have voluntary market where emission trading takes place.
In addition the voluntary markets the US has the Regional Greenhouse Gas Initiative (RGGI) which is a mandatory, market-based effort to reduce greenhouse gas emissions from power plants. Ten Northeastern states have capped and will reduce CO2 emissions from the power sector 10% by 2018. www.rggi.org
Climate Exchanges:
- European Climate Exchange (ECX)
- Climex
- Carbon Trade Exchange (CTX)
- Chicago Climate Exchange (CCX)
- Montréal Climate Exchange (MCeX)
- Australian Climate Exchange (ACX)
- Insurance Futures Exchange Services (IFEX)
- The Green Exchange - (NYMEX)
- California Climate Exchange™ (CaCX™)
- China Beijing Environmental Exchange (CBEEX)
- Tianjin Climate Exchange
- Asian Carbon Trade Exchange (ACT)
- BlueNext Climate Exchange
- Nord Pool Exchange
Disclaimer
The content on this page is not a substitute for professional financial advice. Please consult a financial expert before taking any action suggested on this page.
References
Fast Facts
-
Fact:
NOx emissions from coal-fired power plants have decreased by 3.4 million tons from 1990 levels.
-
Fact:
Since carbon starting trading actively in 2005, has traded in Kyoto compliant countries CO2 has traded in the range of $10-30/ton and in the U. S. (where emissions reduction is voluntary) in a range of $2-4/ton.
-
Fact:
'Landmark' legal opinion finds that indigenous Brazilian tribe in Amazon owns carbon rights.
-
Fact:
China is the world's worst polluting nation with the highest overall annual emission of greenhouse gases (6,018 million tonne). However, in terms of per capita emissions it is ranked 44th in the world, emitting 4.5 tonne (per person).
-
Fact:
If we stopped emitting GHG today there is enough CO2 in the atmosphere to cause climate chaos. It's the "legacy load" of 200 years of industrial emissions. We would need 7 planets.
