A Primer on Climate Change and Carbon Trading

Who regulates climate change and carbon trading?

The answer to this question requires that one first understand the international framework that governs the issue of carbon trading and who are the main players. The point of origin of this framework is the United Nations Convention on Climate Change (UNFCCC), an agreement signed by 189 countries around the world, setting general goals and rules for confronting climate change. It was reached at the United Nations Conference on Environment and Development in 1992 in Rio de Janeiro, Brazil. It was at this conference that the principle of sustainable development was popularized.

The UNFCCC is overseen by the United Nations Climate Change Secretariat. The most visible element of the UNFCCC is the Kyoto Protocol. It was adopted in 1997, and has since been ratified by 164 countries. Its main feature is the introduction of legally binding targets to limit or reduce greenhouse gas emissions for 'Annex I Parties', which consist of 35 countries and the European Economic Community. Canada is a signatory to the Kyoto Protocol.

The Kyoto Protocol contains two of the main features of one approach to greenhouse gas emissions reduction: a targeted limit, or 'cap' on the volume of emissions, and 'carbon trading', which allows the buying and selling permits to emit greenhouse gases. The concepts are related: When a mandatory cap is set, and emitters must reduce emissions or buy credits in order to meet it. Those who reduce further their emissions than beyond what is required can sell their excess credits to others who have not yet met their targets.

As an example, Canada is required to reduce its national emissions to six percent below 1990 levels for the period 2008-2012. To do so, Canada can reduce domestic emissions, and can also invest in emissions-reduction projects in developing countries to earn credits.

This 'cap-and-trade' approach is employed because it uses economic, or 'market-based' incentives to achieve emissions reductions. The rationale is that carbon trading allows emissions to be allocated in the most efficient manner, reducing emissions where it is cheapest to do so and allowing those facing higher costs to purchase credits.

The Kyoto Protocol and the resulting emissions trading markets employ a 'hard cap' on total emissions. Another cap method is to apply 'intensity-targets', which would limit the amount of emissions per unit of output, such as a barrel of oil. This approach has been adopted by the United States, and will be employed by Canada in 2010, before a hard cap will be set after 2020. Both intensity-based targets and hard caps can utilize carbon trading to meet emissions goals.

Another market-based mechanism for reducing greenhouse gas emissions is a 'carbon tax', which would place a financial cost on each unit of emissions. Such a tax could be applied on all emissions, or on emissions above a certain level. Putting a price on emissions would encourage companies to invest in emissions reduction solutions if they were cheaper than the tax.

There is no general consensus on which market-based emissions reduction approach will be most effective, as the world is still in the preliminary phases of a serious approach to climate change. The European Union is using a hard cap and trade scheme, while the United States - and now Canada - employ intensity targets. Countries such as China and India, which have signed the Kyoto Protocol but are not subject to targets, have indicated that they will not accept a hard cap, but are working to improve the emissions intensity of their economies.

Annex I Parties to the Kyoto Protocol are bound by specific emissions reductions targets, as listed in Annex B of the Protocol. The targets are for the First Phase of the Kyoto Protocol, which takes place from 2008-2012. Emissions levels are defined, with 1990 as the baseline year for most countries.

COUNTRIES INCLUDED IN ANNEX B TO THE KYOTO PROTOCOL AND THEIR EMISSIONS TARGETS

Countries* Target for 2008/2012 EU-15: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom - 8% Bulgaria, Czech Republic, Estonia, Latvia, Liechtenstein, Lithuania, Monaco, Romania, Slovakia, Slovenia, Switzerland - 8% Canada, Hungary, Japan, Poland - 6% Croatia - 5% New Zealand, Russian Federation, Ukraine 0 Norway 1% Iceland 10%

The 15 members of the pre-expansion European Union are able to redistribute their targets among themselves to reach their goal, under a provision in the Protocol known as a "bubble". They have reached an agreement on how to do so.

Two notable non-signatory countries are Australia and the United States, which both refused to ratify the treaty on the grounds that it would curb economic growth. Other criticisms of the treaty also focuses on the fact that it does not contain binding targets for developing nations such as China and India, despite their growing share of global greenhouse gas emissions. These countries, as well as many other developing nations, are not part of Annex 1 of the Kyoto Protocol.

Members have finalized many of the rules necessary for some of the market-based investment mechanisms that the Protocol supports, such as the Clean Development Mechanism and Joint Implementation. Both are critical to the carbon trading marketplace.

The first phase of the treaty comes to an end in 2012, and members of the Protocol have committed to negotiating in anticipation of extending a revised version of the agreement.

• Overview
• What are greenhouse gases (GHGS)?
• Who determines whether climate change is real?
• What are the likely impacts of climate change?
• What can be done about climate change?
• Who regulates climate change and carbon trading?
• What are carbon credits and how do they work?
• How do Kyoto Protocol carbon credits work?
• Where are other carbon trading markets located?
• Conclusion