Emissions trading is one of the three market-based mechanisms under the Kyoto Protocol used by Countries with commitments under the Protocol to limit or reduce their greenhouse gas emissions (GHGs) in order to meet their emission targets. The other two are the Clean Development Mechanism (CDM) and Joint Implementation (JI).
Parties (countries) with commitments under the Kyoto Protocol, known as Annex B Parties, have accepted targets for limiting or reducing emissions (see Table 1 below). These targets are expressed as levels of allowed emissions, or “assigned amounts,” measured in “assigned amount units” (AAUs).
Emissions trading, as set out in Article 17 of the Kyoto Protocol, allows countries that have emission units to spare (emissions that are permitted to them but not they do not "use" for whatever reason) to sell this excess capacity to other countries that are over their emission targets. This created a new commodity in the form of emission reductions or removals. Since carbon dioxide (CO2) is the principal greenhouse gas, people speak simply of trading in terms of carbon. Carbon is now tracked and traded like any other commodity, which is now known as the "carbon market."
Under the emissions trading scheme set-up by the Kyoto Protocol, there are more than actual emissions units that can be traded and sold. The other units which may be transferred under the scheme, each equal to one tonne of CO2, may be in the form of:
Removal Unit (RMU) are issued by Parties to the Kyoto Protocol in respect of net removals by sinks from activities covered by Article 3(3) and Article 3(4) of the Kyoto Protocol (on the basis of land use, land-use change and forestry (LULUCF) activities such as reforestation). RMUs are defined in 3/CMP.1, Annex, paragraph 1(d).
Emission Reduction Unit (ERU) is a unit converted from either an assigned amount unit (AAU) or removal unit (RMU) and issued to project participants in Joint Implementation project activities. ERUs are defined in 3/CMP.1, Annex, paragraph 1(a).
Certified Emission Reduction (CER) are issued to project participants in Clean Development Mechanism projects pursuant to Article 12 of the Kyoto Protocol and the CDM modalities and procedures.
- Assigned Amount Units (AAU's) are units issued by Parties to the Kyoto Protocol into their national registry up to their assigned amount, calculated by reference to their base year emissions and their quantified emission limitation and reduction commitment (expressed as a percentage). AAUs are defined in 3/CMP.1, Annex, paragraph 1(b).
Emissions Reduction targets for Annex B countries
The amounts for each country are listed as percentages of the base year, 1990 (except for some former Communist countries), and range from 92% (a reduction of 8%) for most European countries — to 110% (an increase of 10%) for Iceland.
Table 1. Countries included in Annex B to the Kyoto Protocol and their emissions targets.
|Country||Target (1990** - 2008/2012)|
|EU-15*, Bulgaria, Czech Republic, Estonia, Latvia, Liechtenstein, Lithuania, Monaco, Romania, Slovakia, Slovenia, Switzerland||-8%|
|Canada, Hungary, Japan, Poland||-6%|
|New Zealand, Russian Federation, Ukraine||0|
* The 15 States who were EU members in 1997 when the Kyoto Protocol was adopted, took on that 8% target that will be redistributed among themselves, taking advantage of a scheme under the Protocol known as a “bubble”, whereby countries have different individual targets, but which combined make an overall target for that group of countries. The EU has already reached agreement on how its targets will be redistributed.
** Some Economies-in-Transition (EITs) have a baseline other than 1990.
*** The US has indicated its intention not to ratify the Kyoto Protocol.
There are certain criteria that must be met in order for a Party to be eligible to either sell or purchase ERUs, CERs, AAUs, or RMUs:
(a) It is a Party to the Kyoto Protocol;
(b) Its assigned amount (pursuant to Article 3, paragraphs 7 and 8) has been calculated and recorded in accordance with decision 13/CMP.1;
(c) It has in place a national system for the estimation of anthropogenic emissions by sources and anthropogenic removals by sinks of all greenhouse gases not controlled by the Montreal Protocol, in accordance with Article 5, paragraph 1, and the requirements in the guidelines decided thereunder;
(d) It has in place a national registry in accordance with Article 7, paragraph 4, and the requirements in the guidelines decided thereunder;
(e) It has submitted annually the most recent required inventory, in accordance with Article 5, paragraph 2, and Article 7, paragraph 1, and the requirements in the guidelines decided thereunder, including the national inventory report and the common reporting format. For the first commitment period, the quality assessment needed for the purpose of determining eligibility to use the mechanisms shall be limited to the parts of the inventory pertaining to emissions of greenhouse gases from sources/sector categories from Annex A to the Kyoto Protocol and the submission of the annual inventory on sinks; and
(f) It submits the supplementary information on assigned amount in accordance with Article 7, paragraph 1, and the requirements in the guidelines decided thereunder and makes any additions to, and subtractions from, assigned amount pursuant to Article 3, paragraphs 7 and 8, including for the activities under Article 3, paragraphs 3 and 4, in accordance with Article 7, paragraph 4, and the requirements in the guidelines decided thereunder.
In order to address the concern that Parties could "oversell" their units and then subsequently be unable to meet their own emissions targets, each Party is required to maintain a reserve of ERUs, CERs, AAUs and/or RMUs in its national registry. This reserve, known as the "commitment period reserve", should not drop below either 90% of the Party's assigned amount or 100% of five times its most recently reviewed inventory, whichever of the two that is the lowest.
Criticisms of Emissions Trading
Although the concept of emissions trading seems to be beneficial for all parties, it has received much criticism on some of its fundamental flaws. Certain countries had large inefficient industries with high emissions in 1990 that underwent major restructuring during the five years before the Kyoto Protocol was agreed to. Specifically, most of eastern Europe underwent such a transformation following the collapse of communist governments. Thus, countries such as Russia and Germany (where the former East Germany was merged with West Germany) were said to be able to sell "hot air credits" - because changes taking place for other reasons allowed them to achieve their Kyoto Potocol goals very easily and also be able to make a profit on those emissions reductions. Further, other countries could "purchase" those reductions in order to increase their own emission allotments, thereby actually increasing emissions overall relative to what would have been the case without the Kyoto Protocol, instead of keeping the overall emissions at a neutral status because of the trading.
- UNFCCC: CMP Decision 11- Establishing emission trading