Box 12 The Kyoto Protocol And Forestry Carbon Sinks

The accounting period in which Annex I Parties to the UNFCCC that have ratified the Kyoto Protocol need to meet their emission targets, as specified in the Protocol, begins in 2008 and ends in 2012. These targets are expressed as levels of allowed emissions, divided into 'assigned amount units' (AAUs); each AAU being equal to one tonne of CO2e. Emissions trading allows countries that have emission units to spare, that is emissions permitted them but not 'used', to sell this excess capacity to countries that are over their targets (United Nations, 1998: Article 17).

Parties to the Protocol may offset their emissions by increasing the amount of greenhouse gases removed from the atmosphere by so-called carbon 'sinks' in the land use, land-use change and forestry sector. The activities in this sector that are eligible are afforestation, reforestation and revegetation. The Kyoto carbon accounting rules specify that, to qualify, reforestation or afforestation must take place on land cleared before 1990.

Greenhouse gases removed from the atmosphere through eligible sink activities generate credits known as removal units (RMUs). These are interchangeable with AAUs which can be traded internationally. The amount of credit that can be claimed by parties through forestry is subject to a cap.

The Protocol also establishes three mechanisms known as Joint Implementation (JI), the Clean Development Mechanism (CDM) and emissions trading. These are designed to help Annex I Parties cut the cost of meeting their emissions targets by taking advantage of opportunities to reduce emissions, or increase greenhouse gas removals that cost less in other countries than at home. Under the CDM, Annex I Parties may implement projects in non-Annex I Parties that reduce emissions and use the resulting certified emission reductions (CERs) to help meet their own targets. The CDM also aims to help non-Annex I Parties achieve sustainable development and contribute to the objective of the Convention (UNFCCC, 2008a).

At the end of the first commitment period a country must demonstrate compliance with its emission reduction target by holding as many, or more, AAUs, CERs, ERUs and RMUs as its actual tonnes of CO2e emissions during the period 2008-2012.

need to undertake measures to reduce their domestic emissions unless they are in surplus and in a position to sell allowances. Countries have policy choices ranging from the introduction of mandatory requirements for power generation by renewable energy, and the subsidization of renewable energy, to the introduction of a carbon tax or mandatory cap and trade schemes. All countries are interested in adopting policy approaches that do least damage to their economies and this is where carbon taxes and cap and trade have an advantage over trying to 'pick winners' and subsidizing them.

The effect of caps on industry is to raise costs, albeit to lower levels if trade is allowed between scheme participants. The price on allowances to emit CO2e automatically makes energy sources and goods and services that are not carbon intensive more competitive. The imposition of caps on emissions by industry is a mechanism that has already been successful in controlling the level of damaging pollutants in the US, but there are no caps on greenhouse emissions in that country at the time of writing.

The largest regulatory cap and trade scheme by far is the EU Emission Trading Scheme (ETS) launched in 2005. It is estimated that under the EU ETS, 2 billion tonnes of CO2e allowances changed hands, worth US$50 billion in 2007 (Capoor and Ambrosi, 2008). But while EU member countries can trade allowances with one another, and they may buy and sell CERs generated under JI or CDM projects, forestry credits cannot be generated by entities within the EU. Box 1.3 summarizes the mechanism for in-country cap and trade.

There is a strong case for linking country cap and trade schemes internationally. The more participants, the greater the spread of marginal costs of abatement and the greater the gains through trade. And the deeper the market, the better its price formation.

Cap and trade systems can raise money for government if emission allowances are auctioned. Their weakness, compared with a tax, is that political pressure is inevitably applied by industry facing caps. This results in permits being allocated or 'grandfathered' without cost to emitters. This was the case in the EU ETS where most allowances to industry at the outset were allocated rather than auctioned. Moreover, due to misreporting by industry and EU members of emissions levels, the emissions allowances were only slightly less than business-as-usual levels, causing the price of allowances to collapse. The same problem has appeared in the Regional Greenhouse Gas Initiative (RGGI) in the US, whose cap is 188 million tonnes of CO2e, but whose emissions in 2007 were only 164 million tonnes. This over-allocation resulted in a price of only US$3.07 per short ton of CO2e on 29 September 2008 (Evolution Markets, 2008). 2

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