Kyoto Protocol And The Future Of Carbon Trading

President Vladimir Putin’s announcement at the world climate change conference held in Moscow late last month that Russia was still undecided about acceding to the Kyoto Protocol (KP), has undoubtedly come as a blow to those who were hoping for its quick implementation. For with Russia accounting for 17.4% of greenhouse gas emissions at 1990 levels, its accession to the treaty would have allowed it to cross the crucial goal of 55% reduction in emission levels required for it to enter into force.

While Russia’s decision may or may not spell the end of the KP, it may, however, delay its implementation. For developing countries like India, which belong to the category of non-Annexe I countries, and hence are not required to cut their GHG emission levels, it could mean that that their potential of earning lucrative projects through clean development mechanism projects as defined in the KP could be affected.

One of the most important CDMs that are emerging is the system of carbon trading, which allows the development of a market wherein carbon dioxide as well as carbon equivalents, ie, other greenhouse gases like methane, can be traded between participants. The participants could be countries or companies. Though the political and institutional framework for carbon trading is yet to develop, it is generally believed that a potentially large and lucrative global market for carbon trading could develop by the end of the decade.

How does the system work? Once the KP enters into force, Annexe I countries (developed countries) are required to reduce their average GHG emissions by 5% by 2008-12. A country or company wishing to reduce or meet their emission targets can do so by investing in clean projects, which would contribute towards offsetting their GHG emissions, but would also earn the investor some “credits” which would go towards a net carbon reduction. A typical CDM project would be substituting fossil fuel-based power generation with renewable energy or a project that would improve existing energy efficiency levels. Or, as in India, by investing in forestation or community tree planting projects, called “carbon sinks”.

Currently, carbon trading projects take place within some countries including the US and UK, though recently some trade has also taken place between countries, as well. But the potential for inter-state trade has been estimated at around $2 trillion over the next 10 years. However, for a full-fledged carbon trading market to develop, it would be necessary for the KP to come into force as, according to some experts, trading would only make sense if companies operated under emissions caps set by their governments. Without an overarching regulatory mechanism, the system would at best operate informally, providing no incentive for emissions reductions. That is why Russia’s accession is deemed crucial.

However, according to some environmental experts, even if Moscow decides against coming aboard the KP, there is a way out. As per a clause in Article 20 of the protocol, an amendment to the treaty could be adopted by the parties to the Protocol, preferably by consensus, but if not, as a last resort by three-fourths majority vote of the parties, whereby the goal of 55% reduction in emission levels could be reduced and hence allow the treaty to come into force, which would, in turn, take the pressure off the advocates of the treaty to get the requisite countries aboard.