Kyoto Protocol

The Protocol

The Kyoto Protocol was a consequence of the United Nations Framework Convention on Climate Change (UNFCCC – coming into force in 1994 with 166 signatories). The convention had the following objectives and was to be assessed and updated at annual ‘conferences of the parties’ (COPs):
•    Gather and share information on greenhouse gas emissions, national policies and best practices;
•    Launch national strategies for addressing greenhouse emissions and adapting to expected impacts, including the provision of financial and technological support to developing countries;
•    Cooperate in preparing for adaptation to the impacts of climate change.

It was at one of the early COPs – COP3 held in Japan in 1997 – that the Kyoto Protocol was adopted, with its legally binding emissions reduction targets (known as ‘assigned amounts’) during its first commitment period (2008-2012) and with proposed market based mechanisms for meeting them. The Protocol eventually came into effect on February 16th 2005 with 125 countries having ratified it. Listed in Annex B of the Protocol are the nations agreeing to emissions reduction targets, and these countries are known collectively as Annex B parties (the UK is one of them). At its adoption in 1997 there was still much negotiating to be done as to how the Kyoto Protocol mechanisms would work and these issues weren’t resolved until COP7 in 2001. Much of this negotiation concerned the integrity of the proposed methods of reducing emissions – ensuring that reductions were made that were supplemental to a country’s own abatement actions, and ensuring that any emission reduction actions being financially incentivised were as a direct result of the Kyoto Protocol and not just “business as usual”.  

The Kyoto market mechanisms were seated on the economic principles of absolute and comparative advantage and the use of trade. What this means in practice is that if it’s cheaper for you to buy something from someone else than do it yourself, you’ll buy it. In Kyoto terms this means that it may be cheaper for an already relatively efficient and clean factory in a developed country to pay a ‘dirty’ factory in a developing country to clean up its act, than to try to go further itself. Market based methods are appropriate for CO2 emissions because reductions in any country benefit all countries equally. It was however this which was one of the contributory factors to the US government’s decision not to ratify the treaty unless high emitting developing nations (such as India and China) were also given emissions reduction targets instead of enjoying the free ride of the stopping of global warming without the effort of reducing emissions.

Kyoto Mechanisms

The Kyoto mechanisms referred to are the cap and trade based International Emissions Trading (IET) and the project based models of the Clean Development Mechanism (CDM) and Joint Implementation (JI).

International Emissions Trading
IET is the trade of credits that takes place between governments. It is a cap–and–trade scheme, meaning that a group of individuals (countries in this case) are given a finite number of permits to do a certain thing – in this case emit CO2 – and they can either use the permits to do the thing, or sell it to someone else to do the thing.  The finite number will be less than the current collective level of activity, meaning somewhere along the line there have to be reductions in that activity. Where a country finds it cost effective to reduce emissions (by doing things more cleanly) they will do so and sell permits to countries where it’s more expensive to reduce emissions.  These finite permits are called Assigned Amount Units (AAUs).

IET has not been without controversy – the AAUs allocated to each country were the result of negotiations and many have said that too many were awarded, meaning too little in the way of reductions. Another problem has also arisen – that of the so-called ‘Hot Air’ credits. Countries with economies in transition (former Soviet Bloc countries moving from Communism to a free market economy) have experienced considerable  economic decline since their AAU allocations were agreed, meaning these countries now have surplus credits not due to cleaning up their industry but due to just doing less of it by accident. These credits are not seen as credible by the market, but they still have the same legal status as all AAUs and may in the future become a cheap let out for a country short of credits. 

Clean Development Mechanism
The Clean Development Mechanism (CDM) was designed to do two things: (a) enable developed nations to outsource their CO2 reductions to places where it could be done for cost effectively (it’s expensive to reduce emissions by 20% at an already clean factory, cheap to do it at a ‘dirty’ factory, and the environment benefits equally either way), and (b) transfer technology to developing countries in the process. CDM projects must be in countries that are not in Annex B of Kyoto, meaning  permits are being imported into the cap–and–trade system. All of the principles we adhere to at Forest Carbon would be found in a CDM project – additionality, permanence, conservatism – and the credits arising are CERs (Certified Emissions Reductions).  CERs may be used by countries as permits, and some can be used in the EU Emissions Trading Scheme. Examples of CDM projects might include hydro or wind power generation, vehicle engine emissions improvements or low energy lighting.

Joint Implementation
Joint Implementation (JI) is like CDM – project based activities creating new permits – but it takes place in Annex B countries, with the credits being transferred to another Annex B country.