The Kyoto Protocol

At the United Nations Conference on Environment and Development in Rio de Janeiro in 1992, the United Nations Framework Convention on Climate Change (UNFCCC) was created to state that the increase of the greenhouse effect should be stopped and emissions of greenhouse gasses (GHG) should be reduced. On its third Conference, in Kyoto (Japan) in December 1997, the UNFCCC set GHG emission reduction targets for a large number of countries.

 

The Kyoto Protocol sets legally binding limits on GHG emissions in countries that have ratified the Protocol. As climate change is a global problem and it therefore does not matter where the emission reductions are physically achieved, the Kyoto Protocol also envisages a number of market-based flexible mechanisms to promote the most cost-effective way to reduce GHG emissions:

• Emissions Trading;
• Joint Implementation projects;
• Clean Development Mechanism projects.

Emissions Trading

The Kyoto Protocol quantifies GHG emissions in tonnes of carbon dioxide equivalent (CO2e): one tonne of CO2e equals an Assigned Amount Unit (AAU). Each ratifying country will be subject to a maximum number of AAUs, equal to the maximum permissible amount of GHG emission for that country. Countries are allowed to trade AAUs in order to comply with their GHG emission reduction targets under the Protocol.

 

Joint Implementation

Joint Implementation projects allow for investments in GHG emission reduction projects in other countries, provided these projects result in measurable long-term climate change benefits. The investing party is awarded Emission Reduction Units (ERUs), that can be used for ones own emission reduction target, or can be sold to third parties. JI ERUs may not be used until the first commitment period of the Kyoto Protocol, starting in 2008.

 

Clean Development Mechanism

Clean Development Mechanism projects allow for investments in GHG emission reduction projects in developing countries without GHG emission reduction targets. The Clean Development Mechanism promotes sustainable, environmentally friendly developments in developing countries. Investors are awarded Certified Emission Reductions (CERs) that can be used to meet requirements under the Kyoto Protocol as well as under the European Union Emissions Trading Scheme (EU ETS).