Emissions Trading Parties with commitments under the Kyoto Protocol (Annex B Parties) have accepted targets for limiting or reducing emissions. These targets are expressed as levels of allowed emissions, or 'assigned amounts,' over the period of commitment between 2008 and 2012. Emissions trading, as set out in the Kyoto Protocol, allows countries that have emission units to spare (i.e., emissions permitted to an individual country, that are higher then the level of current emissions) to sell this excess capacity to countries that are over their targets.
Clean Development Mechanism (CDM) Under the CDM, countries with emission caps (Annex I countries) assist non-Annex I parties, which do not have emission caps, to implement project activities to reduce GHG emissions (or remove CO2 by sinks). Credits are issued on the basis of emission reductions achieved through the project activities. These credits which are known as certified emissions reductions (CERs, in t CO2e) can be bought and sold. This injects financial incentives into the system. Purchasing these CERs can help companies to meet their emission reduction targets, as set under the EU Emissions Trading Scheme.
Joint Implementation (JI) Under the JI regime, countries with emission caps (Annex I countries) assist other Annex I parties to implement project activities to reduce GHG emissions (or remove CO2 by sinks). Credits are issued on the basis of emission reductions achieved through the project activities (also called emission reduction units, ERUs).
In the European Union (EU) the link between the flexible mechanisms CDM and JI and the European Union Emission Trading Scheme (EU ETS) is the ' Linking Directive ' . The directive regulates that JI/CDM credits can be used by operators to fulfill their obligations under the EU ETS, because it allows the conversion of CERs and ERUs into the EU ETS. That implies the recognition of JI/CDM credits as equivalent to allowances from an environmental and economic point of view.
Out of the Kyoto Protocol is the so called Offset Market. Verified emission reductions (VERs) are frequently used for voluntarily balancing of GHG emissions, demonstrating in this manner a person's or company's responsibility and awareness of climate change issues and contributing to reasonable investments by offsetting carbon emissions. The voluntary carbon offset market allows companies, public bodies and individuals to purchase credits generated from projects that either prevent or reduce an amount of carbon entering the atmosphere, or that capture carbon from the atmosphere. Prices for VERs are lower than for CERs or ERUs.
It is important to consider that market mechanisms can only work if there is a supply and a demand of a product. In our case the products are the CO2 emission certificates. The supply of certificates comes from the EU ETS trading or the flexible mechanisms CDM/JI. Finally the demand is the need of producing companies to emit a certain amount of CO2 and the cap which was set on the political layer. Therefore the Linking Directive (see above) which combines supply and demand is necessary to let the market work.
What do the flexible mechanisms look like from the perspective of the chemical industry? Let us have a look at CDM trades. There we can notice some incentives: companies can use the CDM or JI mechanism to create certificates and sell them to companies which need them. If investments in developing countries are planned, then it should be proved whether a CDM project can be registered. On the other hand, companies can reduce costs by buying CERs or ERUs, if for instance a capacity increase is planned and the necessary CO . certificates are not available. Furthermore companies can use offsets for reputation. And of course there are new jobs and business opportunities in sectors like finance, insurance and consultants. The dynamics of the market can also be seen by the development of trading platforms. There is a growing number of market places creating CO2 prices. Nevertheless most of the trades are direct trades between the partners.
In 2009 about 1800 CDM projects were registered ; the main host countries are China (35%), India (25%), Brazil (9%) and Mexico (7%). The investor countries with the highest number of registered projects are UK (29%), Switzerland (21%), Japan (11%) and the Netherlands (11%). About 4200 CDM projects are in the pipeline.
The market volume of the flexible mechanisms is enormous: In 2008 the volume of the emissions trading amounts to 3300 MtCO 2e or 93 billion US$, where the EU ETS is by far the biggest market. The CDM projects had a total value in 2008 of 390MtC02e or 6.5 billion US$. A smaller role plays JI with 20MtC02e or 200 million US$ and the voluntary market with 50 MtCO 2 e or 400 million US$ (all values from ).
The Kyoto protocol and its mechanisms therefore are not only important with respect to their effect on climate change and CO2 emissions, but they also have a strong economic impact.
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