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The Kyoto Protocol to the United Nations Framework Convention on Climate
Change (UNFCCC) is an amendment to the International Treaty on Climate
Change, assigning mandatory emission limitations for the reduction of
greenhouse gas emissions to the signatory nations.
What Is The Kyoto Protocol?The Kyoto Protocol is an international agreement that arose from the United Nations Framework Convention on Climate Change (UNFCCC). Negotiations for the treaty ended in December 1997 in Kyoto, Japan. Currently, the Kyoto Protocol has 172 signatories [iv] which include
all developed nations except the United States and Australia. The overall objective of the treaty is to reduce Greenhouse Gas emissions in developed countries 5.2% relative to 1990 levels by 2012. However, individual countries have different goals, ranging from an 8% decrease in emissions in the European Union to a 10% increase in Iceland. These goals are designed to be implemented through a major multinational cap-and-trade scheme that includes all signatory nations.
Principles of The Kyoto Protocol
At its heart, the Kyoto Protocol establishes the following principles:
Kyoto is underwritten by governments and is governed by global legislation enacted under the UN’s aegis;
Governments are separated into two general categories: developed countries, referred to as Annex I [v] countries (who have accepted Greenhouse Gas Emission or GHG Emission reduction obligations and must submit an annual greenhouse gas inventory); and developing countries, referred to as Non-Annex I countries (who have no greenhouse gas emission reduction obligations but may participate in the Clean Development Mechanism or CDM [vi]);
Any Annex I country that fails to meet its Kyoto obligation will be penalized by having to submit 1.3 emission allowances in a second commitment period for every ton of GHG emissions they exceed their cap in the first commitment period (i.e., 2008-2012);
By 2008-2012, Annex I countries have to reduce their GHG emissions by a collective average of 5% below their 1990 levels (for many countries, such as the EU member states, this corresponds to some 15% below their expected GHG emissions in 2008). While the average emissions reduction is 5%, national limitations range from 8% reductions for the European Union to a 10% emissions increase for Iceland; but since the EU intends to meet its obligation by distributing different rates among its member states,[vii] much larger increases (up to 27%) are allowed for some of the less developed EU countries.
Kyoto includes "flexible mechanisms"[viii] which allow Annex I economies to meet their greenhouse gas emission limitation by purchasing GHG emission reductions from elsewhere. These can be bought either from financial exchanges, from projects which reduce emissions in non-Annex I economies under the Clean Development Mechanism (CDM), from other Annex I countries under the Joint Implementation, or from Annex I countries with excess allowances.
What this means in practice is that Non-Annex I economies have no GHG emission restrictions, but when a greenhouse gas emission reduction project (a “Greenhouse Gas Project”) is implemented in these countries, that Greenhouse Gas Project will receive Carbon Credit which can be sold to Annex I buyers.
These Kyoto mechanisms are in place for two main reasons:The cost of complying with Kyoto is prohibitive for many Annex I countries (especially those countries, such as Japan or the Netherlands for example, with highly efficient, low greenhouse gas polluting industries, and high prevailing environmental standards). Kyoto therefore allows these countries to purchase Carbon Credits instead of reducing greenhouse gas emissions domestically; and,
This is seen as a means of encouraging Non-Annex I developing economies to reduce greenhouse gas emissions since doing so is now economically viable because of the sale of Carbon Credits.
How Does The Kyoto Protocol Work?
There are three mechanisms through which the Kyoto Protocol attempts to meet these goals:
International Emissions TradingThis system allows countries that cannot meet their own emissions goals to purchase additional credits (called Assigned Amount Units or AAUs) from other countries that have been able to exceed their own goals. Systems have emerged among countries to facilitate this type of trading, the largest of which is the European Emissions Trading System[ix] (EU ETS). The EU ETS began on January 1, 2005 and has a two-phased system. The first phase, which ends December 31, 2007, has come under fire for providing too many credits to its members. As a result, prices for credits have been exceedingly low and the targeted emissions reductions have not been reached. Phase two will run from 2008-2012 with new allocations of credits and more stringent caps on emissions.
Domestic Emissions TradingA number of countries have either implemented or considered introducing their own regional cap-and-trade schemes. These systems allow states, regions, or businesses within a country to trade emissions credits with each other in order to achieve the country-wide emissions goal. A major problem with these schemes is that they often introduce their own units for carbon credits, with their own elements and requirements. As such, there is often little coherence between international trading schemes and domestic trading schemes. There needs to be a single standard and unit for carbon credits. A global market would allow for more gains from trade and would lead to better success for the Kyoto Protocol.
Clean Development Mechanism (CDM)[x]The Kyoto Protocol allows developed countries to offset their excess emissions by reducing emissions in developing countries, where such projects may be more cost-effective (read: inexpensive). Rather than, or in addition to, trading credits with other developed nations, some countries elect to finance emission reduction projects in developing countries through the CDM. Projects in the CDM must go through a complicated and relatively expensive approval process before being accepted as a qualified emissions reduction projects. There are currently 55 countries participating in the CDM with hundreds of types of projects.
Carbon TradingThe limits on GHG emissions set by the Kyoto Protocol are a way of assigning monetary value to the earth's shared atmosphere, something that has been missing until now. Nations that have contributed the most to global warming have tended to benefit directly in terms of greater business profits and higher standards of living, while they have not been held proportionately accountable for the damages caused by their emissions. The negative effects of climate change will be felt all over the world, and actually the consequences are expected to be most severe in least-developed nations which have produced few emissions.
The Kyoto Protocol sets limits on total emissions by the world's major economies, a prescribed number of "emission units." Individual industrialized countries will have mandatory emissions targets they must meet, but it is understood that some will do better than expected, coming in under their limits, while others will exceed them.
The Protocol allows countries that have emissions units to spare i.e. emissions permitted to them but not "used", to sell this excess capacity to countries that are over their targets. This so-called "carbon market", so-named because carbon dioxide is the most widely produced GHG, and because emissions of other GHGs will be recorded and counted in terms of their "carbon dioxide equivalents", is both flexible and realistic. Countries not meeting their commitments will be able to "buy" compliance, but the price may be steep. The higher the cost, the more pressure they will feel to use energy more efficiently and to research and promote the development of alternative sources of energy that have low or no emissions.
A global "stock market" where emissions units are bought and sold is simple in concept, but in practice the Protocol's emissions-trading system has been complicated to set up. The details weren't specified in the Protocol, and so additional negotiations were held to hammer them out. These rules were among the workaday specifics included in the 2001 "Marrakesh Accords." [xi]
The problems are clear: countries' actual emissions have to be monitored and guaranteed to be what they are reported to be; and precise records have to be kept of the trades carried out. Accordingly, "registries" like bank accounts of a nation's emissions units are being set up, along with "accounting procedures," an "international transactions log," and "expert review teams" to police compliance. [xii]
More than actual emissions units will be involved in trades and sales. Countries will get credit for reducing greenhouse-gas totals by planting or expanding forests ("removal units"); for carrying out "Joint Implementation Projects" with other developed countries, usually countries with "transition economies"; and for projects[xiii] under the Protocol's Clean Development Mechanism, which involves funding activities to reduce emissions by developing nations. Credits earned this way may be bought and sold in the emissions market or "banked" for future use.
Some national registry systems under the Protocol have already been set up, as countries are eager to "bank" emissions reductions already accomplished while they wait for the Protocol to win its final ratifications and become legally binding.
Smaller "Carbon Markets" were established by the European Union and other groups of countries; they were operating before the Protocol entered into force. These emission trading systems were intended to start the process and to link up with the Protocol's global market once it becomes operational.
Carbon Trading and Non-ComplianceThe enforcement of the rules is one of the most crucial elements of a trading system. Under the supervision of the Environmental Protection Agency[xiv], a very complex system for verification, tracking of allowances and enforcement has been put in place. Unfortunately, under the conditions of today's international politics and law, such a foolproof regime is not a realistic option. This does not, however, dispense with the necessity to establish a rigorous regime for the international trading of carbon dioxide. Procedures and institutions to monitor, verify, assess compliance and enforce the rules in cases of non-compliance must have top priority in the establishment of the trading regime.
Such a compliance system demands several components: first, monitoring and reporting procedures must be in place. The Kyoto Protocol, in Articles 5 and 7, contains the basis for such procedures that need to be adapted to the needs of a trading regime. Those amended procedures need to provide the information required for the close tracking of trades. Compliance with these requirements must furthermore be a precondition for participation in Emissions Trading. Second, the correctness of the data submitted must be assessed. One of the cornerstones of such a procedure, the verification function, has already been incorporated in the Protocol [xv].
Unfortunately, Article 18 on non-compliance does not lend itself well to the establishment of a sanctions regime for Carbon Trading. Although it requires the Parties to "approve procedures and mechanisms to determine and address cases of non-compliance" with the Protocol, it contains a clause that makes "binding consequences" dependent on a formal amendment. Since an amendment to the Protocol requires ratification by at least three-fourths of the parties[xvi], its entry into force appears to be very unlikely or would at least take an unacceptably long time. Even if such "consequences" would be adopted and applied provisionally in the interim period until the amendment becomes effective, its legal status would probably be diminished due to the above mentioned clause.
The appropriate sanctions - including those with "binding consequences" - should therefore be incorporated into the trading regime. This is possible because Article 18 only talks about binding consequences "under this article". Including sanctions into the Carbon Trading regime would thus have the beneficial side effect of providing the Parties to the Kyoto Protocol with a much needed enforcement regime for the reduction and limitation commitments.
Non-compliance with the rules of the trading system is conceivable in a variety of ways. Participants may fail to fulfill the reporting or monitoring obligations, they may violate the trading rules or cheat and, ultimately, they may fall into non-compliance because at the end of the commitment period they have exceeded their assigned amount of emissions. In order to provide clarity, a non-exhaustive list of possible cases of non-compliance would be helpful.
A great number of possible consequences for infractions of the rules of trading have been outlined in the literature on emissions trading, but some of them - like personal fines and imprisonment for the management of companies involved - are reserved for domestic enforcement.
Should a Party decide to involve private actors, the provision of adequate sanctions at the national level should be compulsory. On the international level, financial sanctions are extremely rare. However, in order to facilitate such fines with regard to non-compliant states, a certain financial deposit should be required for the permission to trade. In case of non-compliance, such deposit might be (partly) lost and go into a fund to finance mitigation and adaptation measures in developing countries.
Carbon Trading itself provides the best means for sanctions. First of all, the parts of assigned amounts can be devalued, either partly or completely. There are basically two approaches, depending on whether liability lies with the seller or with both, buyer and seller (shared liability). Under the traditional rules of international law, the seller only would be responsible for the correctness of his behavior. Sanctions would thus be directed towards the country that has sold parts of its assigned amount although it has breached the rules. In the framework of domestic legal systems, this approach is usually sufficient, since penalties for non-compliance can be severe and will be enforced by the judicial and executive branches of government.
There is a lot of debate over the effectiveness thus far of the Kyoto Protocol. Detractors have a number of complaints. Their strongest complaint, in my opinion, is that the EU ETS handed out far too many allowances (called EU Allocations or EUAs), and in doing so flooded the market with credits and drastically reduced the need to reduce emissions.
In addition, critics note that Kyoto extends only through 2012, not nearly long enough to achieve the sustained reductions necessary for mitigating the climate change crisis. Finally, it is widely believed that many countries will not meet their stated emissions targets by the end of the 2008-2012 cycle.
Most proponents of Kyoto acknowledge these flaws, but view the Protocol as a stepping stone to a better, more effective international cap-and-trade scheme.
Personally, I am inclined to believe that despite Kyoto’s (significant) flaws, it is a major step in the right direction. It is important to keep in mind that the Kyoto Protocol introduced by far the largest cap-and-trade scheme ever, and we are still in the very beginning stages of its implementation.
I am hopeful that it will extend beyond 2012, and as regulators, countries, and industries alike become comfortable under the system, carbon prices will stabilize and significant emissions reductions will take place.
[i] Article 2. The United Nations Framework Convention on Climate Change.
[ii] Article 25 Of the Kyoto Protocol to the United Nations Framework Convention on Climate Change.
[iii] Kyoto Protocol: Status of Ratification (UNFCCC)
[iv] Climate Action Network Europe: Ratification Calendar at www.climnet.org/EUenergy/ratification/calendar.htm
[v] Of the Kyoto Protocol to the United Nations Framework Convention on Climate Change.
[vi] Article 12 Of the Kyoto Protocol to the United Nations Framework Convention on Climate Change Explained in Page 5.
[vii] The Kyoto Protocol - A Brief Summary. European Commission.
[viii] Article 17 Of the Kyoto Protocol to the United Nations Framework Convention on Climate Change.
[ix] From www.ec.europa.eu/environment/climat/pdf/emission_trading2_en.pdf. Retrieved on 21st August 2007.
[x] Article 12 Of the Kyoto Protocol to the United Nations Framework Convention on Climate Change
[xi] Marrakesh Accords is a set of agreements reached at the Conference of the Parties 7 (COP7) meeting in 2001.
[xii] An Introduction to the Kyoto Protocol Compliance Mechanism. UNFCCC. Retrieved on 22nd August 2007.
[xiv] Environmental Protection Agency is the name of several governmental agencies, charged with environmental responsibilities.
[xv] Article 8 Of the Kyoto Protocol to the United Nations Framework Convention on Climate Change.
[xvi] Article 20 Of the Kyoto Protocol to the United Nations Framework Convention on Climate Change.
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