The Kyoto Protocol 

is an international agreement under the United Nations Framework Convention on

Climate Change. The Protocol sets binding targets for the Annex I countries to reduce emission of
greenhouse gases by an average of 5.2 % of the 1990 level over the five-year period 2008 - 2012.

Three market-based mechanismsof the Kyoto Protocol are set up to help meet their targets in a cost
effective and 'green' way

The Kyoto mechanisms are:

 Emissions trading – the carbon credit market

 Clean development mechanism ( CDM )
 Joint implementation ( JI ).

Carbon credits arising from Clean Development Mechanisms (CDM) projects, are known as Certified
Emissions Reductions (CERs).
Carbon credits derived from Joint Implementation (JI) projects are known as Emissions Reductions Units
(ERU). 
Carbon Credits arising from Voluntary schemes are called Voluntary Emissions Reductions (VER)

A carbon credit is given for the reduction of every metric ton of carbon dioxide prevented from being
emitted into the atmosphere from climate change mitigation projects. For example, hydropower projects
replacing coal-fuelled plants, or that sequester carbon through afforestation. Industrialized countries pay
the project. Credits are awarded to developing countries that, through these projects, have reduced
their greenhouse gases below their emission quota. Developed countries buy these credits to help meet
their emission target. 
 

Industrialized country Afforestation project 

   
(Annex I) to meet quota in developing country

Diagram: Explanation of the Clean Development Mechanism: Agroeco.nl  

For further example, if a company in a developing country has a registered projects such as wind
farms which generate energy without resorting to burning of fossil fuel, and has thus reduced carbon
emissions by one ton, the company will be awarded a credit. If a cement manufacturer has an emission
quota of 10 tons, but is expecting to produce 11 tons, he could purchase 1 carbon credit from the planter,
at current market price. As such, both parties benefit; the wind farm owner gets monetary returns. The
cement manufacturer may continue cement production after having fulfilled his carbon quota. The
mechanism is based on the reasoning that an emission reduction in one part of the world is as good for
the atmosphere elsewhere.

According to the World Bank and the International Emissions Trading Association's

(ETS)State of the Carbon Market Report, the global carbon market grew to nearly US$22 billion
in the first nine months of 2006, more than doubling in value over the almost US$11 billion
recorded the previous year.
 
 
CDM Statistics 2010: UNFCCC
 
Expected CERs 
  Annual Average CERs*
until end of 2012**
CDM project pipeline: > 4200 of
N/A > 2,900,000,000
which:
- 2003 are registered 338,991,508 > 1,720,000,000
-     46 are requesting
   7,108,917 >      20,000,000
registration
* Assumption: All activities deliver simultaneously their expected annual average emission reductions 
** Assumption: No renewal of crediting periods 
(UNFCCC) (Jan 2010)

Expected Average Annual CERs from Registered Projects by Country   

Expected Total 338 991 508 - UNFCCC
  
 

  

Registered Projects by A1 and NA1 Investor Parties: UNFCCC

 

 
The objective of the Protocol is noble, but the complex trading system has been open to abuses.
Problems emerge due to serious flaws in the checking system on actual achievement in GHG
reductions. Under the Kyoto Protocol, a CDM project needs to demonstrate that it will lead to
a quantifiable reduction in greenhouse gases. Under the "additionality" principle, it also has to
demonstrate that it would not have been economically viable without the additional capital generated by
carbon trading.

It was estimated that up to 20% of the carbon credits issued did not match genuine reductions. The
system thus risks creating a false sense of security. Critics have argued that the CDM process has been
manipulated, particularly by the owners of large-scale hydropower plants, which remain environmentally
controversial.

Besides questioning the effectiveness of carbon markets, critics also argue that carbon credits can be a
way for an organization to throw money at a problem instead of taking action to reduce their own carbon
footprint of their operations.

Under the UNFCCC, countries are permitted to use a trading system to help meet their emissions
targets. Carbon credits can be traded in the international market on special exchanges, through brokers
or among companies at their current market price. 

China and the United Nations plan to set up a carbon trading exchange in Beijing. On completion, it
would join those in the US and Europe as one of the key centers for the multi-billion-dollar global trading
market for carbon credits. Currently, the European Union emissions trading scheme is the largest in
operation. 
(Xinhua News Agency March 17, 2007)

Some countries are planning to launch their own national trading system in the coming years, although it
is unclear so far as to how these might connect up with the EU ETS.

To drive large scale investments and financial flows to developing countries for significant global
emissions reduction, investment barriers need to be resolved, present CDM need to be extended and
streamlined or new mechanisms established, regional and national carbon markets need to be linked
internationally.