Rising levels of greenhouse gases in the global atmosphere are expected to cause a rise in global temperatures. Although studies are still being conducted, there is general consensus that the global temperature will rise by about 1-3.5°C by the year 2100.

Climate change is likely to have a significant impact on the global environment and human society. In 1997 more than 150 countries adopted the Kyoto Protocol and agreed to set actual targets for the reduction of greenhouse gases.

Under this Protocol to the United Nations Framework Convention on Climate Change (UNFCCC), industrialized countries have adopted legally binding emission levels – at 5.2% below 1990 levels on average. These reductions must be made by the first compliance period, 2008-12.

Governments are considering strategies to make these reductions at minimal cost to national economies.

Market mechanisms provide the essential flexibility that enables countries to achieve their emission targets at lowest cost. The Kyoto Protocol outlines three mechanisms:

1. International Emissions Trading
2. Clean Development Mechanism
3. Joint Implementation

Six types of greenhouse gas are recognized: Carbon dioxide (CO2) Methane (CH4) and Nitrous Oxide (N2O), Hydroflourocarbons (HFCs), Perflourocarbons(PFCs) and Sulphur Hexafluoride (SF6).

Greenhouse Gas Global Warming Potentials (GWPs)*

Carbon Dioxide CO2 1
Methane CH4 21 Methane
Nitrous Oxide N2O 310
Perfluoro-carbons CxFx 6,500-9,200
Hydrofluorocarbons HFCs 100-12,000
Sulphur Hexafluoride SF6 23,900

*GWPs of greenhouse gases has been agreed upon by the Intergovernmental Panel on Climate Change (IPCC), the scientific body to the United Nations Framework Convention on Climate Change. The GWP measures the contribution of individual gases to climate change over a 100 year time period, enabling all greenhouse gases to be measured in CO2 equivalents

KYOTO PROTOCOL MARKET MECHANISMS

Emissions Trading (ET-Article 17)

"The Conference of the Parties shall define the relevant principles, modalities, rules and guidelines, in particular for verification, reporting and accountability for emissions trading. The Parties included in Annex B may participate in emissions trading for the purpose of fulfilling their commitments under Article 3. Any such trading shall be supplemental to domestic actions for the purpose of meeting quantified emission limitation and reduction commitments under that Article."

Emissions Trading allows an Annex I country with an excess of emission units to sell its credits to another Annex I country unable to meet its commitments. The principals, rules and guidelines for trading are to be decided at the sixth Conference of the Parties to the Protocol due to be held in 2000.

The extent to which trading may be used for compliance by countries may be limited by a stipulation in Article 17 that trading should be "supplemental" to domestic actions to meet emission reduction requirements.

Currently, liability in transactions is addressed on a case by case basis. In the successful US sulfur dioxide allowance trading system, the seller is liable if they oversell their credits or the credits are deficient. However, in the greenhouse gas market system liability in transactions has been held by the seller, buyer or shared.

They argue that in many cases the buyer may be in a better position to scrutinize the integrity of the carbon credit. Opponents to a shared liability system argue that the buyer is in less of a position to ensure the integrity of the credit and should not be liable for the seller’s irresponsibility.

In order for developing countries to participate in the trading regime they will likely have to assume emission limitations.

Clean Development Mechanism (CDM - Article 12)

"The purpose of the clean development mechanism shall be to assist Parties not included in Annex I in achieving sustainable development and in contributing to the ultimate objective of the Convention, and to assist Parties included in Annex I in achieving compliance with their quantified emission limitation and reduction commitments under Article 3."

The Clean Development Mechanism (CDM) allows governments or private entities in industrialized countries to implement emission reduction projects in developing countries in order to meet their emission objectives. The industrialized nations receive credit for these projects in the form of "certified emission reductions" (CERs).

There are several discrepancies in the construction of the article on CDM compared to the other flexibility mechanisms. There is no requirement that CDM activities be "supplemental" to domestic actions. Therefore, an Annex I country could forego domestic measures completely and use credits obtained through the CDM to meet its obligations. The article on CDM differs because Parties can begin accruing CER credits in 2000.

Reduction in emissions from CDM projects must be "additional" to what would have otherwise occurred. Therefore, baseline emission levels must be developed.

The Protocol calls for a percentage of the proceeds from CDM projects to be used to cover CDM administrative costs and to assist developing countries in meeting the costs of "adaptation." How "adaptation" will be defined is unclear, however, the funds will most likely be dispersed to developing countries to conduct self-assessments and produce strategic plans on how best to adapt to their changing climate.

Joint Implementation (JI - Article 6) -
Activities Implemented Jointly (AIJ - Article 6)

"For the purpose of meeting its commitments under Article 3, any Party included in Annex I may transfer to, or acquire from, any other such Party emission reduction units resulting from projects aimed at reducing anthropogenic emissions by sources or enhancing anthropogenic removals by sinks of greenhouse gases in any sector of the economy….."

Joint implementation (JI) allows Annex I countries to work together to meet their emission targets. The Parties may transfer or acquire emission reduction units (ERUs) resulting from projects and activities implemented in other Annex I countries. Article 6 contains a provision to include projects that enhance carbon sinks. Sinks are natural ecosystems such as forests that sequester carbon.

A baseline on emissions must be established in order to measure net reductions in GHG emissions. The two methods for determining a baseline that have been most widely discussed are a top-down and project-by-project approach. Because JI projects are between Annex I parties, a project-by-project baseline may be unnecessary as emissions will be monitored at the national level in order to ensure compliance. Therefore, a top-down approach to baseline setting may be the most efficient. In a top-down approach the government would set the baseline and ensure industry compliance. Governments will be motivated to set accurate baselines because they will not want to risk over-selling emission credits and a breach of the Protocol. The obvious advantages of using a top-down baseline system are that costs of regulation are minimized and project implementation would be streamlined.