CDM/JI and Emissions Trading

Under the Kyoto Protocol, the industrialised nations have agreed to reduce their greenhouse gas emissions. To ensure the agreed targets are complied with, the Protocol sets out a comprehensive emissions management system. This works on the principle that for each tonne of greenhouse gas emitted, industrialised countries must be in possession of an internationally recognised emissions certificate. Accounting of emissions and assigned amounts takes place according to commitment periods. The Protocol provides for four types of emission certificates:

• Assigned Amount Units (AAUs) are emission reduction certificates assigned to industrialised nations ahead of the commitment period.

• Certified Emission Reductions (CERs) are issued for climate change projects carried out in developing countries by industrialised nations using the Clean Development Mechanism (CDM).

• Emission Reduction Units (ERUs) are issued for climate change projects carried out by industrialised nations in other industrialised countries using the Joint Implementation (JI) mechanism.

• Removal Units (RMUs) are issued for national sink activities in industrialised states. Under Article 3.3 and 3.4 of the Kyoto Protocol, states may count an unlimited number of sink activities performed on their territory against their greenhouse gas emissions.

The emission allowances to be assigned to each industrialised nation for the first commitment period (2008–2012) are set out in the Kyoto Protocol. The amounts are based on emission quantities for a base year (mostly 1990) plus a reduction factor.

Article 3.1 of the Protocol requires that at the end of the first commitment period, industrialised countries surrender carbon credits in the amount of their actual emissions during the commitment period. Clearly defined sanctions apply to states that fail to comply.

Industrialised nations may use all four types of emission reduction certificates to meet their Kyoto commitments. The Kyoto Protocol does not rigidly cap the level of emissions allowed by industrialised nations during the commitment period. Instead, it provides a number of options: national Kyoto commitments can be achieved entirely by means of domestic measures, or countries may invest additionally in CDM and JI projects in order to obtain CERs and ERUs. There are also other mechanisms by which states can cooperate in efforts to mitigate climate change.

International Emissions Trading

International trade in carbon credits allows industrialised nations to exchange the certificate types defined in the Kyoto Protocol. It is difficult to say how important emissions trading is going to be because it is subject to vehement attack and is seen as politically unacceptable. Critics of the Kyoto Protocol primarily refer to the ‘oversupply’ of AAUs to Eastern European states and fear a trade in ‘hot air’, meaning the transfer of ‘too generously’ allocated AAUs to industrialised countries in the west without any additional climate protection in the seller state. This standpoint is somewhat diffused, however, where purchase of the AAUs clearly leads to additional investment in climate change activities.

Business-Level Emissions Trading

Industrialised countries can consolidate and establish a transnational emissions trading scheme which is operated at business level. Ratification of the EU Emissions Trading Directive in 2003 is a fitting example of how this works. Under the Directive, the EU Member States are required to introduce an emissions trading scheme according to standardised provisions. The underlying idea is similar to that of the Kyoto Protocol. Operators of specific industrial installations and combustion facilities are not allowed to emit greenhouse gases unless they are in possession of an EU Allowance. Allowances are calculated according to commitment periods and operators are assigned an initial quantity of EU allowances prior to the start of a commitment period. Once trading of EU allowances begins, these must be recognised by each EU Member State regardless of where they originated. Cooperation with other industrialised nations outside the EU benefits from Article 25 of the EU Emissions Trading Directive, which allows linking between the EU Emissions Trading Scheme and emissions trading schemes in other countries. Thus, non-EU industrialised nations may cooperate with EU Member States by engaging in business-level cross-border emissions trading.

All of these cooperation options are laid down in the Kyoto Protocol, but there is a superordinate requirement for the states to implement climate change mitigation measures within their own borders. This is why use of the Protocol’s flexible mechanisms is subject to the principle of supplementarity. This principle is enshrined in the Kyoto Protocol, the Bonn Agreement (2001), the Marrakech Accords (2001) and the decisions made at the Montreal COP/MOP (2005). Supplementarity means that cooperation with other states may only be entered into to supplement domestic emission reductions. After all, by setting out reduction targets for the first commitment period, the main aim of the Kyoto Protocol is to achieve a shift in industrialised countries’ greenhouse gas emission patterns.

The principle of supplementarity has not, however, been quantified at UN level and its implementation thus plays a key role in EU climate change policy. The EU Linking Directive adopted in September 2004 to allow the incorporation of CDM/JI projects into the EU Emissions Trading Scheme requires that starting with the 2008-2012 trading period, the Member States cap the number of CDM and JI-generated emission reduction certificates they will use to meet their EU Emissions Trading Scheme targets. Also, the Member States must report to the EU Commission every two years on their use of the project-based mechanisms in their own countries and on the ratio in which they are used compared to national measures. Where appropriate, the Commission can draw up recommendations to ensure national (domestic) measures take priority.

For more on the use of emission reduction certificates, see The Carbon Market for CDM/JI-Generated Carbon Credits.