What is the Kyoto Protocol?
The Kyoto Protocol, adopted unanimously at the meeting of the Conference of Parties to the United Nations Convention on Climate Change held in Kyoto, Japan in 1997, went into effect on February 16, 2005. The agreement legally binds participating industrialized countries to reduce their emissions of greenhouse gases during the five year commitment period of calendar years 2008 – 2012 as compared to baseline emissions in the year 1990. The Protocol does not set limits on the greenhouse gas emissions of developing nations. So far, the agreement had been ratified by 141 countries, representin over 61% of global emissions. Those countries include the 25 countries of the Europea Union, China, India, Japan, Canada, Russia and New Zealand. The U.S. has not ratified the agreement.
Do Multi-national US companies have to comply with the Kyoto Protocol?
However, even though companies in the U.S. are not subject to Kyoto’s emission caps, U.S. companies that operate in nations complying with the Kyoto Protocol do have to meet those countries’ caps.
What are the targets under Kyoto?
Commitments under the Protocol vary from nation to nation. The overall 5% target for developed countries is to met through cuts of 8% in the EU and 6% in Poland, for example. The agreement offers flexibility in how countries may meet their targets. For example they may partially compensate for their emissions by increasing “sinks” – forests, which remove carbon dixide from the atmosphere. Or they may pay for foreign mechanisms set up for this purpose such as emissions trading, the Clean Development Mechanism (CDM) or joint implementation, which are explained below.
- – International Emission Trade (ET)
- – Clean Development Mechanism (CDM)
- – Joint Implementation (JI)
What is Emission Trading?
Emissions Trading. The Protocol allows countries that have emission units to spare – emissions permitted them but not “used” – to sell this excess capacity to countries that are over their targets. This so-called “carbon market” is 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. Some national registry systems under the Protocol have alrady been set up, as countries are eager to “bank” emissions reductions already accomplished. Smaller “carbon markets” are now being established by the EU and other groups of countries.
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JI and CDM are project related. An investor achieves a measurable CO2 reduction in another country, which can be sold to a country requiring the reduction. Such investments in energy projects are of interest to the host country because they contribute to sustainable economic growth. These are projects that might not have been achieved without carbon finance.JI is aimed at countries that also have a reduction obligation under Kyoto, mainly Central and Eastern Europe. CDM focuses on developing countries without reduction obligation. JI program allows industrialized countries to meet part of their required cuts in greenhouse gas emissions by paying for projects that reduce emissions in other industrialized countries. In practice, this will likely mean facilities built in the countries of Eastern Europe (including Poland) and the former Soviet Union (the so-called “transition economies”) will be paid for by Western European and North American countries. The sponsoring governments will receive credits that may be applied to their emissions targets and the recipient nations will gain foreign investment and advanced technology (but not credit toward meeting their own emissions caps; they will have to do that themselves).
Clean Development Mechanism. Through the CDM, developing countries get involved. Industrialized countries pay for projects that cut or avoid emissions in poorer nations, and are awarded credits that can be applied to meeting their own emissions targets. The recipient countries benefit from free infusions of advanced technology that allow their electrical generating plants and factories to operate more efficiently. This mechanism has drawn extensive interest from rich and poor countries alike, and steps have been taken to put it into operation. It is cost-effective and offers a degree of flexibility to industrialized countries trying to meet their targets. The system also appeals to private companies and investors. The mechanism is meant to work bottom-up; to proceed from individual proposals to approval by donor and recipient governments to the allocation of “certified emissions reduction” credits. Countries earning the credits may apply them to meeting their emissions limits, may “bank” them for use later or may sell them to other industrialized countries under the emissions trading system described above. Private firms are interested in the mechanism because they may earn profits from proposing and carrying out such work and because they may develop good reputations for their technology which will lead to further sales.
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What are the Benefits of Carbon Credits?
Benefits for a client to acquire Carbon Credits include:
(1) provide an additional source of revenue;
(2) improve the return on their investments;
(3) boost the economic feasibility of projects; and
(4) accelerate project implementation.
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What are carbon credits?
Carbon credits are reductions of emissions of greenhouse gasses caused by a project / an investment. One carbon credit is 1 t CO2 equivalent. In JI carbon credits are officially called Emission Reduction Units or ERUs. In the CDM they are called Certified Emission Reductions or CERs. CO2e, is the same as a carbon credit, ERU or CER.
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Companies in countries can buy the emissio reduction achieved (carbon credits) that you realise
through your investment and that would not have existed without your investment.Prices are realised
by process of competitive bidding. Carbon credits may be generated from investments in renewable energy,
energy efficiency, fuel switch and waste management projects.
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– renewable energy (e.g. wind mills)
– biomass (heat and/or power)and cogeneration
– improving energy efficiency by replacing existing equipment (installing new efficient, new water pumps etc.)
– fuel switch (e.g. switch the fuel for a boiler from coal to biomass)
Energy demand – replacement of existing electrical equipment with more efficient units and improvement
of energy efficiency of existing production equipment.
Transport – more efficient engines for transport (e.g. replacing old diesel trains by modern diesel trains)
– model shift (e.g. from plane to train) and – fuel switch (e.g. public transport buses fuelled by natural gas)
Waste management – captur of landfill methane emissions & utilisation of waste and wastewater emissions
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Before you can sell carbon credits you first of all determine how much your project reduces emissions.
Prior to this you define a baseline, which is a scenario in which you provide supporting evidence about
what the emission of greenhouse gases would be until 2012 without your investment. You compare this
baseline with the lower emission that will be achieved through your investment. The difference between
them is the amount of saleable carbon credits. In the case of JI projects you can only sell the reduction
achieved between 2008 and 2012 and not what you achieved in the previous years or years after.