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The Kyoto Protocol is an agreement made
under the United Nations Framework Convention on Climate Change
(UNFCCC). Countries that ratify this protocol commit to reduce their
emissions of carbon dioxide and five other greenhouse gases, or
engage in emissions trading if they maintain or increase emissions
of these gases.
The Kyoto Protocol now covers more than 160 countries
globally and over 55% of global greenhouse gas (GHG) emissions.
At its heart, Kyoto
establishes the following principles:
Kyoto is underwritten by governments and is governed
by global legislation enacted under the UN's aegis
Governments are separated into two general categories:
developed countries, referred to as Annex 1 countries (who have
accepted GHG emission reduction obligations); and developing
countries, referred to as Non-Annex 1 countries (who have no GHG
emission reduction obligations)
Any Annex 1 country that fails to meet its Kyoto
target will be penalized by having its reduction targets decreased
by 30% in the next period.
By 2008-2012, Annex 1 countries have to reduce their
GHG emissions by around 5% below their 1990 levels (for many
countries, such as the EU member states, this corresponds to some
15% below their expected GHG emissions in 2008)
includes "flexible mechanisms" which allow Annex 1 economies to meet
their GHG targets by purchasing GHG emission reductions from
elsewhere. These can be bought either from financial exchanges (such
as the new EU Emissions Trading Scheme) or from projects which
reduce emissions in non-Annex 1 economies under the Clean
Development Mechanism (CDM), or in other Annex-1 countries under the
Only CDM Executive Board-accredited Certified Emission
Reductions (CER) can be bought and sold in this manner. Under the
aegis of the UN, Kyoto established this Bonn-based Clean Development
Mechanism Executive Board to assess and approve projects (“CDM
Projects”) in Non-Annex 1 economies prior to awarding CERs. (A
similar scheme called “Joint Implementation” or “JI” applies in
transitional economies mainly covering the former Soviet Union and
What this means in practice is that Non-Annex 1
economies can continue to pollute the environment without reprimand,
but when a GHG emission reduction project (a “GHG Project”) is
implemented in these countries, that GHG Project will receive Carbon
Credits which can be sold to Annex 1 buyers.
The Kyoto linking
mechanisms are in place for two main reasons:
the cost of complying with Kyoto is prohibitive for
many Annex 1 countries (especially those countries, such as Japan or
the Netherlands for example, with highly efficient, low GHG
polluting industries, and high prevailing environmental standards).
Kyoto therefore allows these countries to purchase Carbon Credits
instead of reducing GHG emissions domestically; and,
seen as a means of encouraging Non-Annex 1 developing economies to
reduce GHG emissions since doing so is now economically viable
because of the sale of Carbon Credits.
All the Annex 1 economies have established Designated
National Authorities to manage their GHG portfolios under Kyoto.
Countries including Japan, Canada, Italy, the Netherlands, Germany,
France, Spain and many more, are actively promoting government
carbon funds and supporting multilateral carbon funds intent on
purchasing Carbon Credits from Non-Annex 1 countries. These
government organizations are working closely with their major
utility, energy, oil & gas and chemicals conglomerates to try to
acquire as many GHG Certificates as cheaply as possible.
Virtually all of the Non-Annex 1 countries have also
set up their own Designated National Authorities to manage the Kyoto
process (and specifically the “CDM process” whereby these host
government entities decide which GHG Projects they do or do not wish
to support for accreditation by the CDM Executive Board).
objectives of these opposing groups are quite different. Annex 1
entities want Carbon Credits as cheaply as possible, while Non-Annex
1 entities want to maximize the value of Carbon Credits generated
from their domestic GHG Projects.