Kyoto Protocol Article 17 - Emissions Trading

"The Conference of the Parties shall define the relevant principles, modalities, rules and guidelines, in particular for verification, reporting and accountability for emissions trading. The Parties included in Annex B may participate in emissions trading for the purpose of fulfilling their commitments under Article 3. Any such trading shall be supplemental to domestic actions for the purpose of meeting quantified emission limitation and reduction commitments under that Article."

Overview

Recognizing that countries and businesses face widely differing economic costs in trying to achieve emission reductions, emissions trading of GHGs is included in the Kyoto Protocol as a means to dramatically reduce the cost of compliance. It allows nations to fulfill part of their emissions reduction obligations by purchasing reductions from other nations. With emissions trading, emitters have the choice of making the reductions themselves or purchasing reductions from countries or companies in a position to reduce the same quantity of emissions at lower cost.

Under an international emissions trading system, the total GHG emissions of each industrialized country would be limited according to the emission targets agreed upon in the Kyoto Protocol. Countries subject to these targets would be allocated Assigned Amount Units (AAUs), the total of which cannot exceed the limits for GHG emissions in the Protocol. Countries could then allocate emission permits to entities representing emission sources within their country, which would enable individual sectors or firms to participate in the international system. If a participant does not need all of its allocated emission permits, it can then sell or trade them to another participant who needs them to cover its emission needs. Emission trading therefore provides a financial incentive for reduction of GHGs below required levels. Through emissions trading, a market price emerges which reflects the cost of pollution reduction. Each participant can then decide whether it is cheaper to reduce emissions or to purchase permits or credits.

How Would Emissions Trading Work?

The tradable unit is metric ton units of CO₂ emission reductions, or CO₂ equivalent emission reductions. Carbon dioxide equivalents (CO₂e) provide a universal standard of measurement against which the impacts of releasing different GHGs can be evaluated. Every GHG has a Global Warming Potential (GWP), a measurement that describes its effect on climate change relative to a similar amount of CO₂. Six types of GHGs are internationally recognized.

*The global warming potentials of greenhouse gases are established by the Intergovernmental Panel on Climate Change (IPCC), the scientific body to the United Nations Framework Convention on Climate Change.

Emission reduction credits are generated by specific and identifiable actions taken to reduce GHG emissions. This reduction must be quantifiable by acceptable, transparent and replicable calculation methodology. Each emission reduction activity/project is unique, and the quality of the reduction depends on the level of documentation and analysis provided. For example, a reduction could be generated by displacement of fossil fuel usage with lower-emitting or non-emitting sources of energy, such as renewable energy. Reductions could also be created by energy-efficient upgrades of equipment or by employing new technologies to reduce emissions. The recovery and/or flaring of methane from various agricultural and landfill sources is another example of an emission-reducing activity. Methane that would otherwise be emitted is either captured for use as fuel or flared to reduce the amount of gas released into the atmosphere. Other important activities for mitigating GHG emissions are forest projects, which enhance absorption of emissions by trees and other vegetation. Improving forest management can significantly reduce emissions through practices such as controlling deforestation, preserving old-growth forests and by planting trees on unused or marginal farmland.

COP-7

Parties adopted a package of decisions on all of the Protocol’s cooperative mechanisms, including recommendations for COP/MOP-1. The Protocol’s provisions on the mechanisms were expanded by the Marrakesh Accords, which include a decision setting out the principles, nature and scope of all three mechanisms, individual decisions containing operational rules for joint implementation, the CDM and emissions trading, and a decision setting out a system of registries.

The Marrakesh Accords recognize that the Protocol has not created any "right, title or entitlement" to emit and call on Annex I Parties to implement domestic action to reduce emissions, so as to narrow per capita differences between developed and developing countries while working toward achievement of the ultimate objective of the Convention. The Accords do not impose any concrete limits on the extent to which the mechanisms may be used to meet emission targets. However, Annex I Parties must demonstrate in their national communications that their use of the mechanisms is "supplemental to domestic action" and constitutes "a significant element" of their efforts to achieve their targets.

Under the emissions trading, an industrialized country may acquire assigned amount units (AAUs) from other industrialized countries that find it easier, relatively speaking, to meet their emissions targets. This enables Parties to utilize lower cost opportunities to reduce emissions, irrespective of the Party in which those opportunities exist, in order to lower the overall cost of reducing emissions. Similarly, Annex I Parties may also acquire ERUs (from joint implementation projects), CERs (from CDM projects) or RMUs (from sink activities) from other Annex I Parties. Transfers and acquisitions are to be tracked through national registries.

In order to address the concern that Annex I Parties could "over-sell" and then be unable to meet their own emission targets, each Party is required to hold a minimum level of ERUs, CERs, AAUs and/or RMUs in their national registry. This is known as the commitment period reserve. It is calculated as 90 per cent of the Party’s assigned amount or as the level of national emissions indicated in the Party’s most emissions inventory (multiplied by five, for the five years of the commitment period), whichever is the lower figure. Parties may also authorize legal entities to participate.

Emissions trading was not debated at SB-16.