Global Emission Market

The Kyoto Protocol

The supplementary protocol to the United Nations Framework Convention on Climate Change (UNFCC), which was signed at the 3rd World Climate Conference in Kyoto in 1997, is primarily aimed at the reduction of greenhouse gas emissions as the main cause of global warming. In the framework of the Kyoto Protocol, 160 countries and economic organizations have undertaken to comply with mandatory target values regarding the emission of greenhouse gasses. For example, the Kyoto Protocol provides for a reduction of the annual greenhouse gas emissions by the industrialized countries by on average 5.2 percent below the 1990 levels for the period from 2008 to 2012.

However, a key industrialized country such as the U.S. has not signed this document. Moreover, the strict restrictions regarding emissions are not applicable to developing countries, such as China or India.

In order to implement its aims the Kyoto Protocol provides for several flexible mechanisms:

Emissions Trading

In the framework of emission trading, the respective state issues Emission Allowances to the companies taking part in the scheme or the state auctions off such allowances. In an ideal case, every company is assigned fewer allowances than it needs for current operations without modernization measures. Hence, the companies can weigh the pros and cons of the purchase of Emission Allowances and investments into emission-reducing measures.

Clean Development Mechanism (CDM)

The project-based CDM measure is intended to help keep the costs required for compliance with the reduction targets established in the agreement as low as possible. A country which is specified in the Annex 1 to the Kyoto Protocol can buy Carbon Credits from a country which is not listed there. This creates the possibility of reducing greenhouse gas emissions where this can be achieved at the lowest price. Moreover, another desired side effect is the transfer of state-of-the-art technology to developing countries.

Joint Implementation (JI)

This project-based measure is used for the implementation of emission-reducing measures between two countries listed in the Annex 1 to the Kyoto Protocol. The investor country is granted the right to produce further emissions. As in the case of the CDM, an investment into emission-reducing measures in the host country is frequently more cost-effective than a reduction of emissions within the investor country. The host country, on the other hand, benefits from the sale of the Emission Allowances and from the transfer of technology from the investor country.

Additional information on the Kyoto Protocol can be found in the November 2007 edition of the Eurex Newsletter Xpand.