Kyoto & Carbon Trading

THE KYOTO PROTOCOL

Key amongst the various achievements of the Kyoto Protocol was to establish a set of legally binding greenhouse-gas emission quotas that were accepted by most industrialised countries. The Kyoto Protocol requires member countries to reduce their collective emissions to 5.2% below their 1990 levels throughout the first commitment period of 2008 to 2012.

KYOTO AND CARBON TRADING

The vast majority of the international scientific community is now united in accepting global warming as fact. Various human activities - notably the burning of fossil fuels - have led to excessive warming of the atmosphere by releasing into it large amounts of so-called greenhouse gases, the most important of which is CO2. The build up of these gases causes the 'greenhouse effect' - through trapping heat in the atmosphere in much the same way as heat is trapped in a greenhouse.

The main source of these greenhouse-gas emissions is energy production. Burning coal, oil and natural gas accounts for roughly 80% of all greenhouse-gas emissions. What is less well known is that the second largest source of greenhouse-gas emissions is deforestation. When forests are cleared for agriculture or development, most of the carbon in the burned or decomposing trees escapes into the atmosphere as CO2. It is estimated that 3-9 billion tonnes of CO2 are released in this way every year. Reforestation, however, can have the opposite effect, because growing trees absorb CO2.

Models predict that average global temperatures may rise by up to 5.8°C by 2100, with dramatic consequences. Melting ice-sheets and glaciers mean that the mean sea level is expected to rise by up to 88cm, causing low-lying areas to flood. Some scientists also attribute the increase in extreme weather conditions - storms, floods, droughts - to global warming.

The international community is confronting this situation through the United Nations Framework Convention on Climate Change, adopted in 1992, and which now includes 185 Members. The set of agreements that it brokered are known as the Kyoto Protocol.

CARBON TRADING

The trading of CO2 and other greenhouse-gas emissions has existed for several years. The greenhouse-gas emissions market is developing rapidly and analysts forecast that by 2010 the overall market could be worth upwards of US$10 billion a year.

The largest market by far is the EU Emissions Trading Scheme (EU ETS), which opened in January 2005.

The EU ETS covers 11,500 industrial installations across sectors that include oil refining, power generation, pulp and paper manufacturing and cement production. All European Union companies in certain energy-intensive sectors must monitor and comply with allocated emission quotas.

Each EU country is given a national allocation of CO2 emissions and that country then allocates emission allowances to companies in the relevant industry sectors. The companies must annually surrender sufficient emissions allowances and carbon credits to equate to the amount of CO2 units that they have emitted in that year. Any shortfall can be covered by purchases of emissions allowances or credits on the open market. If the companies don't submit sufficient emission allowances or credits they will be fined (at a rate of €40 per tonne, rising to €100 per tonne in 2008).

Under the provisions of the EU ETS, CERs can be traded and used fully interchangeably with emissions allowances, hence the price of emissions allowances is a proxy for the likely value of CERs.

In the first eight months of trading, EU allowance prices rose from around €8 per tonne to a peak of €30 per tonne before settling back to around €22 per tonne by the end of August. Traded volumes averaged 8.5 million tonnes a month.

Outside the EU ETS there are a number of other carbon emission trading schemes, including programmes in countries that have not signed up to the Kyoto Protocol. For example, in both the US and Australia, certain individual state governments are introducing legislation that places binding constraints on greenhouse-gas emissions, despite the lack of action at a national level.

 

The Kyoto Protocol  treaty was negotiated in December 1997 at the city of Kyoto, Japan and came into force February 16th, 2005.

"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."

Text of the Kyoto Protocol | Kyoto Protocol Wiki