About Emissions Trading

Emissions trading is increasingly seen as the policy instrument of choice wherever policy makers seek to achieve significant reductions in greenhouse gas emissions. International emissions trading is a key element of the Kyoto Protocol while national and regional schemes are being implemented or are under active consideration in the European Union, Canada, Japan, New Zealand and in a number of states in the United States. There is, more generally, growing interest in the use of economic instruments in environmental management. International and domestic trading issues and opportunities are of growing interest to stakeholders in the Asia-Pacific region. This interest reflects developments in the region and beyond.

International emissions trading

In December 1997 the Kyoto Protocol established legally binding targets for developed countries to limit greenhouse gas emissions (subject to ratification). Targets or 'assigned amount units' (AAUs) were set relative to emissions in 1990 and apply for the initial target period of 2008 - 2012.

Fundamental to the Kyoto Protocol are its 'flexibility mechanisms' (also known as 'Kyoto mechanisms') which give developed country parties more flexible and cost effective options for meeting their targets. A key flexibility mechanism is international emissions trading, a 'cap and trade' arrangement under which countries are able to buy or sell part of their assigned emission allocation. It is expected that most governments will devolve the right to trade to companies and others.  The other flexibility mechanisms, the Clean Development Mechanism (CDM) and Joint Implementation (JI), are ‘baseline and credit’ schemes under which abatement projects in developing and developed countries respectively can earn emission credits for use in meeting developed country targets.

In emissions trading terms, the Kyoto Protocol represents a cap and trade scheme for developed country parties, supported by a baseline and credit scheme for developing countries. Consequently the entry into force of the Kyoto Protocol on 16 February 2005 has prompted the rapid development of an international emissions trading market. This has been given particular impetus by the implementation of an extensive emissions trading scheme within the European Union, with links to other Kyoto Protocol parties. Other national and regional trading schemes are also being implemented.

With the first Kyoto commitment period due to end in 2012, international negotiations under the auspices of the United Nations Framework Convention on Climate Change (UNFCCC) are now underway to establish a new agreement that will follow on from the Kyoto Protocol and more effectively manage global emissions. Intensive negotiations are scheduled through 2008 and 2009 following the 'Bali Roadmap'. It is the intention that an agreement will be reached at the Conference of the Parties to the UNFCCC in Copenhagen in December 2009.

International trading potential

Emissions trading has the potential to generate valuable trading and investment (as well as environmental) benefits in the region. Many companies would like to sell Kyoto compliant emission credits into the global market while others would like to buy such credits as a way of offsetting their emissions. Other companies in both developed and developing countries in the region are interested in business opportunities associated with the other Kyoto mechanisms, such as the Clean Development Mechanism and Joint Implementation.