Carbon trading & Emission trading under Kyoto

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, at over the 2008-2012 commitment period (1st round) and 2013-2020 (2nd round). The allowed emissions are divided into assigned amount units (AAUs).

Countries bound to Kyoto targets have to meet them largely through domestic action — that is, to reduce their emissions onshore. But they can meet part of their targets through three “market-based mechanisms”.

The Kyoto Flexible Market Protocol mechanisms include:

  • Emission Trading
  • Joint Implementation (JI)
  • Clean Development Mechanism (CDM)

Emissions trading, as set out in Article 17 of the Kyoto 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.

Thus, a new commodity was created in the form of emission reductions or removals. Since carbon dioxide is the principal greenhouse gas, people speak simply of trading in carbon. Carbon is now tracked and traded like any other commodity. This is known as the “carbon market.”


The other units which may be transferred under the scheme, each equal to one tonne of CO2, may be in the form of:

  • A removal unit (RMU) based on land use, land-use change and forestry (LULUCF) activities such as reforestation.
  • An emission reduction unit (ERU) generated by a joint implementation project.
  • A certified emission reduction (CER) generated from a clean development mechanism project activity.
  • The mechanism known as “joint implementation”, defined in Article 6 of the Kyoto Protocol, allows a country with an emission reduction or limitation commitment under the Kyoto Protocol (Annex B Party) to earn emission reduction units (ERUs) from an emission-reduction or emission removal project in another Annex B Party, each equivalent to one ton of CO2, which can be counted towards meeting its Kyoto target.
  • The Clean Development Mechanism (CDM), defined in Article 12 of the Protocol, allows a country with an emission-reduction or emission-limitation commitment under the Kyoto Protocol (Annex B Party) to implement an emission-reduction project in developing countries. Such projects can earn saleable certified emission reduction (CER) credits (Carbon credits), each equivalent to one ton of CO2, which can be counted towards meeting Kyoto targets.
    • (Carbon credit is a tradable certificate or permit. One Carbon credit = 1 ton of Carbon Dioxide)
    • Carbon trading is the name given to exchange of emission permits.
  • Carbon trading is of two types:
    • Emission trading
    • Offset trading.

(Emissions trading allows countries to sell unused emission units to countries that have exceeded their targets. Carbon is tracked and traded like any other commodity in a “carbon market.” Under offset trading, carbon credit is to be earned by a country by investing some amount of money in such projects, known as carbon projects, which will emit lesser amount of greenhouse gas in the atmosphere. For example, suppose a thermal plant of 800 megawatt capacity emit 400 carbon-equivalent in the atmosphere. Now a country builds up an 800 megawatt wind energy plant which does not generate any amount of emission as an alternative of the thermal plant. Then by investing in this project the country will earn 400 carbon-equivalent.)

  • Kyoto Protocol emission target gases includes:
    • Carbon dioxide (CO2),
    • Methane (CH4),
    • Nitrous oxide (N2O),
    • Sulphur hexafluoride (SF6),
    • groups of hydro fluorocarbons (HCFs) and
    • Groups of Per fluorocarbons (PFCs).

Transfers and acquisitions of these units are tracked and recorded through the registry systems under the Kyoto Protocol.

An international transaction log ensures secure transfer of emission reduction units between countries.

The commitment period reserve

To address the concern that Parties could “oversell” units, and subsequently be unable to meet their own emissions targets, each Party is required to maintain a reserve of ERUs, CERs, AAUs and/or RMUs in its national registry. This reserve, known as the “commitment period reserve”.

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