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  The Market for Carbon CreditsCountries covered by the Kyoto Protocol have been allocated allowances by the UN in the form of “Assigned Amount Units” (AAUs), which cumulatively define the maximum emissions each country is allowed during the commitment period. Each AAU represents one metric ton of carbon dioxide. To make it easier for countries to meet their commitments, and to allow for emissions reductions as cost effectively as possible, three flexible mechanisms have been established:
The idea behind the mechanisms is that emission reductions should be allowed to occur where the cost of reduction is lowest. From a global climate perspective, it makes no difference where emissions – or reductions in emissions – take place. Via all three mechanisms, a country can be credited for emission reductions that take place in another country. The latter two, the CDM and JI, are known as project-based mechanisms, as they are linked to specific emission reduction projects. Emission reductions realized via the various mechanisms have different names, but each unit corresponds to one ton of carbon dioxide, and can be traded in the market for emission allowances. Emissions TradingInternational emissions trading means that countries who have made a Kyoto commitment to limit their emissions can buy allowances allocated in the form of AAUs. This trading occurs between countries during the Kyoto Protocol’s first commitment period, 2008–2012, and should not be confused with the European Union Emission Trading Scheme (EU ETS). ETS trading began with a “trial period”, 2005–2007, and continues now with a new trading period, 2008–2012. The EU ETS allocates plants in the energy sector and energy intensive industries a certain number of EU Allowances (EUAs), each equivalent to one ton of carbon dioxide, for each year during the trading period. Plants that emit less carbon dioxide than permitted by their EUAs can sell their surplus allowances to facilities that do not have enough allowances to cover their emissions. In Sweden, more than 730 facilities are included in this system. In the EU as a whole, about 13,000 plants are included, facilities that produce about 40 percent of the total emissions of carbon dioxide in the EU. During the first trading period, only carbon dioxide emissions were covered by the trading system. Beginning in 2008, nitrous oxide emissions were also included in some countries. According to the European Commission’s proposal, more gases and businesses will be included beginning in 2012. In October 2008, it was decided that all flights starting or landing at an airport in the EU will be included in the system as of January 1, 2012. Emissions from aviation in 2012 are capped at 97 percent of the average emissions for 2004-2006, and beginning in 2013, they will be capped at 95 percent. In Sweden, allowances were allocated for 2005–2007 amounting to about 23.2 million tons per year, representing about 40 percent of Sweden’s total carbon dioxide emissions. For the period 2008–2012, the amount was reduced to 22.5 million allowances per year. Throughout the entire EU, allowances equal to approximately 2.1 billion tons per year were allocated. Trading was managed via an electronic system which, in Sweden, has been administered by the National Energy Authority. Anyone can open an account with the Authority and buy allowances. Individuals or companies not covered by emissions trading, can remove a given amount of carbon dioxide from the trading system (and thus from the real world) by purchasing allowances corresponding to that amount and then refraining from reselling them. The Clean Development MechanismThe CDM makes it possible for a developed country with a Kyoto commitment to be credited for emission reductions abroad via investments in projects that reduce emissions in countries that have no such commitments (mainly developing countries). Projects under the CDM are designed not only to reduce or avoid greenhouse gas emissions, but also to promote technology transfers, capacitybuilding, and sustainable development in the country where the investments are made. In addition, projects must meet the requirement of “additionality”, which means that the emission reductions that take place through the CDM project are larger than what would have been accomplished were the project not to exist. The host country is required to demonstrate that the project contributes to sustainable development before the project can be approved and registered as a CDM project. To ensure that the specified emission reductions are actually achieved, the CDM is surrounded by an extensive regulatory and administrative process. Projects must be registered and approved by the CDM Board, set up by the UN climate convention. Before the emission allowances are issued, an independent third party must verify the emissions reduction. The emissions allowances generated by CDM projects are called Certified Emission Reductions (CERs). CERs can be purchased both by countries (in order to meet their Kyoto commitments) and by businesses to meet their commitment within the European ETS. Joint ImplementationJI is based on the same principles as the CDM, but the projects are carried out in a country that has a commitment under the Kyoto Protocol, i.e. a developed country. An important difference between JI and CDM is that no new emissions allowances are created; rather a number of host country AAUs are converted into certificates called Emission Reduction Units (ERUs). JI provides two alternatives for implementation: “track 1” or “track 2”. On track 1, approved projects and allowances are transferred between countries without scrutiny by the UN. This is possible because both countries have committed to limit their emissions and the net results therefore amount to a “zero-sum game”. Track 1 assumes that both countries meet certain criteria regarding the registering and reporting of greenhouse gases. If these criteria are not met, implementation and monitoring are carried out under a regulatory framework similar to that of the CDM. Limited Use of the CDM and JIAccording to the Kyoto Protocol, emissions trading and the use of project-based mechanisms such as JI and CDM may only be “supplemental”, i.e. a complement to the national measures implemented to reduce emissions. These mechanisms may only serve as a limited part of any country’s efforts to fulfill their commitment. The EU trading system is managed according to the “supplementarity principle”, which calls for the European Commission to regulate how many CERs and ERUs may be used by member state facilities. In the case of Sweden, the Commission restricted the use of CERs and ERUs in the period 2008–012 to 10 percent of the allocated amount of European allowances. Limits vary, however, from one plant to another. Within the framework of the EU energy and climate package, the use of the CDM and JI may increase during the third trading period, 2013–2020. The upper limit was set at 50 percent of overall EU emissions reductions between 2008 and 2020. This proportion may increase further if the EU’s emission targets are cut as a result of an international agreement. A Growing MarketAn allowance or emission credit always corresponds to one ton of carbon dioxide, irrespective of whether it is being traded according to the EU ETS or Kyoto Protocol mechanisms. All types of allowances can be bought and sold on the international market for emission allowances. Demand for emission allowances is created by countries who wish to fulfill their commitment under the Kyoto Protocol, by companies subject to the EUs emissions trading and – just as an example – by companies who have entered into voluntary agreements on emissions reductions with countries such as Japan. New emissions markets are starting up one after another in different parts of the world. In September 2008, New Zealand mandated a trading system to start in 2009, and in Australia a trading system is planned for 2010. In September 2008, the first auction of allowances in the US took place, despite the country being outside the Kyoto Protocol. The first trading system in the US, encompassing ten states in the Northeast, started operations on January 1, 2009. Seven states in the western US have also reached agreement with three provinces in Canada on the outlines of a trading system to start in 2012. With the Obama administration now in place, the introduction of a federal emissions trading scheme seems very likely. Even in terms of emission credits from CDM projects, recent developments show rapid growth. In December 2007 there were hardly 2,800 projects in the pipeline. By the end of 2008, the number had increased to over 4,200 projects. Of these, 1,363 were registered by the United Nations and found themselves at various stages in the process of validation and registration. By the end of the year, 250 million CERs had been issued by the CDM Board. By the end of 2012, at least 2.9 billion CERs are expected to have been issued. Global Trade a RealityThe dream of global emissions trading became a reality in October 2008, thanks in part to the fact that all parties with a quantitative commitment under the Kyoto Protocol had already set up the prerequisite national electronic registries in which emissions are recorded. EU member nations’ national registries have previously been linked with each other through the EU-controlled transaction log of the ETS. In order to enable global emissions trading, however, all transactions need to be controlled on a broader international level. Thus in October 2008, national registries were linked up against the International Transaction Log (ITL) controlled by the United Nations. The ITL serves as a central hub where all emission credits from the Kyoto mechanisms are verified to ensure that no double counting occurs. Online connection makes it possible for nations, businesses, organizations and others to electronically transfer the emission reductions from CDM and JI projects. The national registries and the UN’s transaction log also make it possible to see how well countries comply to their emissions commitments. |
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