A Primer on Climate Change and Carbon Trading

How do Kyoto Protocol carbon credits work?

There are two main vehicles under the Kyoto Protocol that govern the trading of carbon credits. These are the Clean Development Mechanism and Joint Implementation.

The Clean Development Mechanism (CDM) is a mechanism of the Kyoto Protocol that allows Annex I countries to implement emissions reducing or offsetting projects in non-Annex I countries, and earn Certified Emissions Reductions (CERs) that can be applied to meet their own targets. The general principle behind the CDM is that emissions reductions may be achieved in developing nations in a more cost-effective manner than in industrialized countries.

Joint Implementation (JI) is a mechanism of the Kyoto Protocol that allows Annex I countries to implement emissions reducing or offsetting projects in another Annex I country, and earn Emissions Reduction Units (ERUs) that can be applied to meet their own targets. Most JI projects likely will take place in Economies in Transition, such as former Soviet bloc countries, where projects are cost-effective.

Emissions Reduction Units (ERUs) are carbon credits that are earned through the Joint Implementation mechanism of the Kyoto Protocol. They allow Annex I countries to invest in emissions reducing or offsetting projects in another Annex I country, and earn credits that can be applied to their own national targets. ERUs are issued in units of one metric tonne of carbon dioxide equivalent.

Certified Emissions Reductions (CERs) are emissions credits that have been earned under the Clean Development Mechanism. When an Annex 1 country invests in a project in a developing country that reduces emissions, either by making a true emissions cut through the installation of energy efficiency or pollution control equipment, or by offsetting emissions through the creation of a carbon sink, they can apply to the UNFCCC to have the emissions reductions certified.

These credits can then be applied against the Annex 1 country's emissions targets. CERs also are issued in units of one metric tonne of carbon dioxide equivalent.

In both cases, emissions reductions arising from any project must be verified by a competent national authority before they can be 'certified' and made available for trading. In Canada, the Canadian GHG Reductions Registry© has been developed to provide a service for organizations that wish to have GHG reduction projects reviewed and registered. The annual emission reductions and subsequent transactions (transfer of ownership, sale, or permanent retirement - formerly the Canadian GHG Credit Registry) can also tracked in this registry. The acronym RERs refers to "Registered Emission Reductions" that result from project activities.

• 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