CO2 Market

The Kyoto Protocol is a protocol to the United Nations Framework Convention on Climate Change (UNFCCC), aimed at fighting global warming. The Kyoto protocol is an international environmental treaty with the goal of achieving the stabilisation of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system.

The Protocol was initially adopted on 11 December 1997 in Kyoto, Japan, and entered into force on 16 February 2005. As of late 2011, 191 states have signed and ratified the protocol. The only remaining signatory not to have ratified the protocol is the United States. In December 2011, Canada denounced the Protocol.

Under the Protocol, 37 countries (“Annex I countries”) commit themselves to a reduction of four greenhouse gases (GHG) (carbon dioxide, methane, nitrous oxide, sulphur hexafluoride) and two groups of gases (hydrofluorocarbons and perfluorocarbons) produced by them, and all member countries give general commitments. At negotiations, Annex I countries collectively agreed to reduce their greenhouse gas emissions by 5.2% on average for the period 2008-2012. This reduction is relative to their annual emissions in a base year, usually 1990.

The Protocol allows for several “flexible mechanisms”, such as emissions trading, the clean development mechanism (CDM) and joint implementation to allow Annex I countries to meet their GHG emission limitations by purchasing GHG emission reductions credits from elsewhere, through financial exchanges, projects that reduce emissions in non-Annex I countries (CDM projects), from other Annex I countries (JI projects), or from annex I countries with excess allowances (GIS and AAU trading).

The European Union Emissions Trading Scheme (EU ETS) was the first large emissions trading scheme in the world. It was launched in 2005 to combat climate change and is a major pillar of EU climate policy. The EU ETS currently covers more than 10,000 installations with a net heat excess of 20 MW in the energy and industrial sectors which are collectively responsible for close to half of the EU’s emissions of CO2 and 40% of its total greenhouse gas emissions.

Under the EU ETS, large emitters of carbon dioxide within the EU must monitor their CO2 emissions, and annually report them, as they are obliged every year to return an amount of emission allowances to the government that is equivalent to their CO2 emissions in that year. The 1st EU ETS Trading Period expired in December 2007; it had covered all EU ETS emissions since January 2005. With its termination, the 1st phase EU allowances became invalid. Since January 2008, the 2nd Trading Period is under way which will last until December 2012. Currently, the installations get the trading credits from the NAPS (national allowance plans) which is part of each country’s government. Besides receiving this initial allocation, an operator may purchase EU and international trading credits. If an installation has performed well at reducing its carbon emissions then it has the opportunity to sell its credits and make a profit. This allows the system to be more self contained and be part of exchange traded markets¬†without much government intervention.

In January 2008, the European Commission proposed a number of changes to the scheme, including centralized allocation (no more national allocation plans) by an EU authority, a turn to auctioning a greater share (60+ %) of permits rather than allocating freely, and inclusion of other greenhouse gases, such as nitrous oxide and perfluorocarbons. These changes are still in a draft stage; the mentioned amendments are only likely to become effective in the 3rd Trading Period under the EU ETS. Also, the proposed caps for the 3rd Trading Period foresee an overall reduction of greenhouse gases for the sector of 21% in 2020 compared to 2005 emissions. The EU ETS has recently been extended to the airline industry as well. These changes took place starting January 2012.*

*text based on articles available in

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