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Emissions Trading

Emissions Trading and Flexible Mechanisms according to Kyoto Protocol

After years of negotiation, the Kyotop protocol was passed in 1997 and paved the way for a world-wide climate protection policy. The aim was to reduce the greenhouse gas emissions. Several industrialized countries and newly industrialized countries (the so-called Annex-I countries) have agreed to reduce their greenhouse gas emissions by 5 per cent between 2008 and 2012. The aim is to surpass the 1990 emissions by 5 per cent. With 92 per cent of the emissions this aim was set for Germany and the European Union in 1990. Within the so-called EU Burden Sharing, Germany has agreed on reducing the emissions by 21 per cent. Developing countries are excepted from reduction obligations.

In addition to carbon dioxide, the Kyoto Protocol considers methane, nitrous oxide, as well total as partly fluorinated hydrocarbons and sulfurhexafluorid as greenhouse gas emissions. Their different effects on the climate paved the way for the introduction of the Global Warming Potential (GWP), which means that the effectiveness of a particular unit of a climate gas is related to the effectiveness of the same unit of CO2. Therefore, CO2 can be said to have a Global Warming Potential of 1. The GWP of methane equals approximately 21, for the other greenhouse gases the GWPs are considerably higher.

The Kyoto protocol will come into effect when the following conditions are met: 1.) It must be ratified by at least 55 countries. 2.) The Annex I countries to ratify the treaty must be responsible for 55% of the emissions. This aim is not achieved at present, because neither Russia nor the U.S.A. have ratified the treaty. Political efforts, especially on behalf of the E.U., are currently aiming at Russia’s ratification and thus putting the Kyoto Protocol into practice.

In order to meet the obligation of reduction, emissions can be traded between Annex-I countries. However, trading will not only take place on a nation-wide level. On the contrary, the individual countries identify industrial sectors that are particularly marked for greenhouse gas, and whose enterprises receive a certain amount of continually decreasing emission rights. The enterprises are obliged to exhaust only as much greenhouse gas as they have agreed on. If the emissions of a company are higher than the emission rights, the company can buy emission rights from other companies that do not need their total. This procedure will lead to the realization of reductive measures wherever they are most convenient. The companies therefore have the choice between taking their own measures for reducing the emissions or buying more options. The decision will always rely on their own measures as long as they undercut the current market price for emission rights. The emissions trading mechanism on the company level will come into effect in the course of the EU emissions trading system starting in 2005.

Apart from reducing their own emissions, the companies have other mechanisms to improve their emission balance. By means of so-called project-related measures, emission certificates can be generated. In this connection a company invests in an emission-reducing project and receives a credit note in the form of certificates. The two mechanisms to differentiate are the so-called Joint Implementation (JI) and the Clean Development Mechanism (CDM). JI refers to emissions-reduction projects that invest in another Annex-I country. CDM means that the investment is related to a country outside the Annex-I countries.




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