The Kyoto Protocol’s Flexibility Mechanisms
The Kyoto Protocol defined the flexible market mechanisms, which are based on the trade of emissions permits. The Protocol established that countries must meet their targets through national measures, however an additional mean of three market-based mechanisms were developed to support counties to succeed.
The flexibility mechanisms were created to respond to the demands of some of the Parties during the negotiations of the Kyoto Protocol. High emitting countries asked for instruments to reduce compliance costs, while developing countries requested instruments to stimulate their sustainable development through finance and technology transfers. This led to creation of the world’s first global carbon market.
These mechanisms intended cost-effectively to enable Parties to achieve their emission targets and remove GHG from the atmosphere in other countries. It does not matter where emissions are reduced, the benefit for the atmosphere will be the same, regardless of where the action is taken. Besides that, these mechanisms stimulate sustainable development through investments and technology while encouraging developing countries and the private sector to contribute to the climate goals.
There are two types of markets included into the flexibility mechanisms:
Crediting mechanisms where projects that reduce emissions are developed to issue credits that are traded and sold to entities seeking to meet their voluntary or compliance climate obligations
Trading carbon allowances where emitters are provided with emission permits or allowances that can be traded among other entities.
The three flexibility mechanisms established by Kyoto Protocol were: Clean Development Mechanism (CDM), Joint Implementation (JI) and the International Emissions Trading.
Clean Development Mechanism (CDM)
The Clean Development Mechanism, also known as CDM, was defined in Article 12 of the Kyoto Protocol and it started operations at the beginning of 2006. It allowed Parties under the Kyoto Protocol (Annex B) with an emission reduction or limitation commitment to implement a projects in developing countries to achieve their goals. These projects generated tradable Certified Emission Reduction (CER) credits, which could be counted towards meeting Kyoto targets.
The CDM promoted sustainable development by urging the implementation of green technologies, investing in clean energy, and supporting capacity-building initiatives in host countries. Projects eligible for the CDM could range from renewable energy installations, energy efficiency improvements, afforestation and reforestation activities, methane capture and utilization, to various other emission reduction initiatives.
To be eligible and certified, projects must undergo a rigorous validation and verification process to ensure that they result in real and measurable emission reductions. Besides, projects must demonstrate some of the key aspects of carbon markets, such as additionality.
The CDM ceased to operate after December 31, 2020, with the expiration of the Kyoto Protocol’s commitment periods at the end of the same year. The mechanism no longer accept new project registrations or issuances of new CERs, however CDM active projects can transfer to other schemes. Its closure was part of the transition to the new framework established by the Paris Agreement.
Joint Implementation (JI)
The Joint Implementation mechanism, which was defined in Article 6 of the Kyoto Protocol, provided a framework for developed countries to collaborate on emission reduction projects with other developed countries. The main objective of JI was to encourage cooperation and cost-effective emission reductions by allowing countries to earn Emission Reduction Units (ERUs) for their participation in such projects.
JI and CDM operated similarly, they both offered Parties a flexible and cost-efficient means of fulfilling a part of their Kyoto commitments, while the host Party benefited from foreign investment and technology transfer. The difference between these two flexibility mechanisms is that under JI, a country with an emission reduction target (the investing country) could invest in emission reduction or removal projects in another country with a similar target (the host country), meaning that both Parties belong to Annex I (developed countries). On the other hand, under CDM Annex I Parties invested in projects hosted in Annex B Parties (low and middle-income countries).
The investing country received ERUs equivalent to the emission reductions achieved by the project, which were counted towards its own emission reduction target. JI projects covered various sectors, such as renewable energy, energy efficiency, and other GHGs mitigation activities. A meticulous verification process was established to ensure that the emission reductions were real, measurable, and additional, meaning they go beyond what would have happened without the project.
While JI’s operational period under the Kyoto Protocol finished on December 31st 2020, it laid the groundwork for similar cooperation mechanisms in subsequent climate agreements, such us Paris Agreement. During its operations, 597 projects were registered in Annex I countries.
International Emissions Trading
European Union Emissions Trading System (EU ETS)
In 2005, the EU ETS was launched, becoming the first and largest international carbon scheme in force.
The EU ETS covers approximately 40% of EU GHG emissions and includes more than 11,000 installations in the energy, domestic aviation and industrial sectors. It aims to reduce EU net GHG emissions at least 55% by 2030 and reach climate neutrality by 2050.
The system works by setting a cap on emissions for each installation and allowing companies to trade allowances to emit a certain amount of GHGs. This has incentivized companies to reduce their emissions and invest in low-carbon technologies. Carbon credits from CDM and JI were allowed during several phases of the scheme.
International Carbon Reduction and Offset Alliance (ICROA)
The development and growth of carbon markets has also led to the establishment of international independent standards to ensure that carbon offsets contribute to the reduction of GHG emissions, while bringing transparency and credibility on the process.
In 2008, the International Carbon Reduction and Offset Alliance (ICROA), was established to set a framework for carbon offset projects in the Voluntary Carbon Markets.
ICROA is a non-profit membership organization, that promotes high quality carbon credits with its Code of Best Practice, which their members sing up and report against.
There are currently 4 endorsed United Nations and government standards, and 9 independent standards.