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Participation of countries in Kyoto Protocol. Countries, which have Signed and ratified the Protocol, are marked by green light; countries, which Have signed the Protocol and are hoping for its ratification in soon future Are yellow; USA and Australia have signed the Protocol, but they have denied To ratify it, this countries are marked by red.

The Kyoto Protocol is an agreement made under the United Nations Framework Convention on Climate Change (UNFCCC). Countries that ratify this protocol commit to reduce their emissions of carbon dioxide and five other greenhouse gases, or engage in emissions trading if they maintain or increase emissions of these gases.

The Kyoto Protocol now covers more than 163 countries globally and over 65% of global greenhouse gas (GHG) emissions.

At its heart, Kyoto establishes the following principles:

  • Kyoto is underwritten by governments and is governed by global legislation enacted under the UN’s aegis
  • Governments are separated into two general categories: developed countries, referred to as Annex 1 countries (who have accepted strict GHG emission reduction obligations); and developing countries, referred to as Non-Annex 1 countries (who have no GHG emission reduction obligations)
  • Any Annex 1 entity failing to meet its Kyoto targets is subject to a fine and further penalised by having its reduction targets increased by 30%
  • By 2008, Annex 1 countries have to reduce their GHG emissions to around 5% below their 1990 levels (for many countries such as the EU members that corresponds to some 15% below their expected GHG emissions in 2008)
  • Kyoto includes “linking mechanisms” which allow Annex 1 economies to meet their GHG targets by purchasing GHG emission reductions from elsewhere. These can be bought either from financial exchanges (such as the new EU Emissions Trading Scheme) or directly from Non-Annex 1 economies on a private basis
  • Only CDM Executive Board-accredited CERs can be bought and sold in this manner. Under the aegis of the UN, Kyoto established this Vienna-based Clean Development Mechanism Executive Board to assess and approve projects (“CDM Projects”) in Non-Annex 1 economies prior to awarding CERs. (A similar scheme called “Joint Implementation” or “JI” applies in transitional economies mainly covering the former Soviet Union and Eastern Europe).


What this means in practice is that Non-Annex 1 economies can continue to pollute the environment without reprimand, but when a GHG emission reduction project (a “GHG Project”) is implemented in these countries, that GHG Project will receive Carbon Credits which can be sold to Annex 1 buyers.

The Kyoto linking mechanisms are in place for two main reasons:

* the cost of complying with Kyoto is prohibitive for many Annex 1 countries (especially those countries, such as Japan or the Netherlands for example, with highly efficient, low GHG polluting industries, and high prevailing environmental standards). Kyoto therefore allows these countries to purchase Carbon Credits instead of reducing GHG emissions domestically; and,
* this is seen as a means of encouraging Non-Annex 1 developing economies to reduce GHG emissions since doing so is now economically viable because of the sale of Carbon Credits.

All the Annex 1 economies have established Designated National Authorities to manage their GHG portfolios under Kyoto. Countries including Japan, Canada, Italy, the Netherlands, Germany, France, Spain and many more, are actively promoting government carbon funds and supporting multilateral carbon funds intent on purchasing Carbon Credits from Non-Annex 1 countries. These government organisations are working closely with their major utility, energy, oil & gas and chemicals conglomerates to try to acquire as many GHG Certificates as cheaply as possible.

Virtually all of the Non-Annex 1 countries have also set up their own Designated National Authorities to manage the Kyoto process (and specifically the “CDM process” whereby these host government entities decide which GHG Projects they do or do not wish to support for accreditation by the CDM Executive Board).

The objectives of these opposing groups are quite different. Annex 1 entities want Carbon Credits as cheaply as possible, whilst Non-Annex 1 entities want to maximise the value of Carbon Credits generated from their domestic GHG Projects.

Status of the agreement
The treaty was negotiated in Kyoto, Japan in December 1997, opened for signature on March 16, 1998, and closed on March 15, 1999. The agreement came into force on February 16, 2005 following ratification by Russia on November 18, 2004. As of April 2006, a total of 163 countries have ratified the agreement (representing over 61.6% of emissions from Annex I countries) UNFCCC.int Duwe, Matthias. Notable exceptions include the United States and Australia. Other countries, like India and China, which have ratified the protocol, are not required to reduce carbon emissions under the present agreement.

According to terms of the protocol, it enters into force "on the ninetieth day after the date on which not less than 55 Parties to the Convention, incorporating Parties included in Annex I which accounted in total for at least 55% of the total carbon dioxide emissions for 1990 of the Parties included in Annex I, have deposited their instruments of ratification, acceptance, approval or accession." Of the two conditions, the "55 parties" clause was reached on May 23, 2002 when Iceland ratified. The ratification by Russia on 18 November 2004 satisfied the "55%" clause and brought the treaty into force, effective February 16, 2005.

Details of the agreement
According to a press release from the United Nations Environment Programme:

"The Kyoto Protocol is an agreement under which industrialized countries will reduce their collective emissions of greenhouse gases by 5.2% compared to the year 1990 (but note that, compared to the emissions levels that would be expected by 2010 without the Protocol, this target represents a 29% cut). The goal is to lower overall emissions of six greenhouse gases - carbon dioxide, methane, nitrous oxide, sulfur hexafluoride, HFCs, and PFCs - calculated as an average over the five-year period of 2008-12. National targets range from 8% reductions for the European Union and some others to 7% for the US, 6% for Japan, 0% for Russia, and permitted increases of 8% for Australia and 10% for Iceland."

It is an agreement negotiated as an amendment to the United Nations Framework Convention on Climate Change (UNFCCC, which was adopted at the Earth Summit in Rio de Janeiro in 1992). All parties to the UNFCCC can sign or ratify the Kyoto Protocol, while non-parties to the UNFCCC cannot. The Kyoto Protocol was adopted at the third session of the Conference of Parties (COP) to the UNFCCC in 1997 in Kyoto, Japan.

Most provisions of the Kyoto Protocol apply to developed countries, listed in Annex I to the UNFCCC.

Financial commitments

The Protocol also reaffirms the principle that developed countries have to pay, and supply technology to other countries for climate-related studies and projects. This was originally agreed in the UNFCCC.

Emissions trading

Main article: Emissions trading

Kyoto is a ‘cap and trade’ system that imposes national caps on the emissions of Annex I countries. On average, this cap requires countries to reduce their emissions 5.2% below their 1990 baseline over the 2008 to 2012 period. Although these caps are national-level commitments, in practice most countries will devolve their emissions targets to individual industrial entities, such as a power plant or paper factory. This is the case today in the EU, and other countries may follow suit in time.

This means that the ultimate buyers of Credits are often individual companies that expect their emissions to exceed their quota (their Assigned Amount Units, Allowances for short). Typically, they will purchase Credits directly from another party with excess allowances, from a broker, from a JI/CDM developer, or on an exchange.

National governments, some of whom may not have devolved responsibility for meeting Kyoto targets to industry, and that have a net deficit of Allowances, will buy credits for their own account, mainly from JI/CDM developers. These deals are occasionally done directly through a national fund or agency, as in the case of the Dutch government’s ERUPT programme, or via collective funds such as the World Bank’s Prototype Carbon Fund (PCF). The PCF, for example, represents a consortium of six governments and 17 major utility and energy companies on whose behalf it purchases Credits.

Since Carbon Credits are tradable instruments with a transparent price, financial investors have started buying them for pure trading purposes. This market is expected to grow substantially, with banks, brokers, funds, arbitrageurs and private traders eventually participating. Emissions Trading PLC, for example, was floated on the London Stock Exchange's AiM market in 2005 with the specific remit of investing in emissions instruments.

Although Kyoto created a framework and a set of rules for a global carbon market, there are in practice several distinct schemes or markets in operation today, with varying degrees of linkages among them.

Kyoto enables a group of several Annex I countries to join together to create a so-called ‘bubble’, or a cluster of countries that is given an overall emissions cap and is treated as a single entity for compliance purposes. The EU elected to be treated as such a group, and created the EU Emissions Trading Scheme (ETS) as a market-within-a-market. The ETS’s currency is an EUA (EU Allowance). The scheme went into operation on 1 January 2005, although a forward market has existed since 2003.

The UK established its own learning-by-doing voluntary scheme, the UK ETS, which runs from 2002 through 2006. This market will exist alongside the EU’s scheme, and participants in the UK scheme have the option of applying to opt out of the first phase of the EU ETS, which lasts through 2007.

Canada and Japan will establish their own internal markets in 2008, and it is very likely that they will link directly into the EU ETS. Canada’s scheme will probably include a trading system for large point sources of emissions and for the purchase of large amounts of outside credits. The Japanese plan will probably not include mandatory targets for companies, but will also rely on large-scale purchases of external credits.

Next to the EU ETS, the most important sources of credits are the Clean Development Mechanism (CDM) and the Joint Implementation (JI) mechanism. Both of these allow the creation of new Carbon Credits by developing emission reduction projects in Non-Annex I countries (in the case of CDM) and in Annex I countries (in the case of JI). CDM projects produce Certified Emission Reductions (CERs), and JI projects produce Emission Reduction Units (ERUs). CERs are valid for meeting EU ETS obligations as of now, and ERUs will become similarly valid from 2008 (although individual countries may choose to limit the number and source of CER/JIs they will allow for compliance purposes starting from 2008). CERs/ERUs are overwhelmingly bought from project developers by funds or individual entities, rather than being exchange-traded like EUAs.

Since the creation of these instruments is subject to a lengthy process of registration and certification by the UN, and the projects themselves require several years to develop, this market is at this point almost completely a forward market where purchases are made at a deep discount to their equivalent currency, the EUA, and are almost always subject to certification and delivery (although up-front payments are sometimes made). According to IETA, the market value of CDM/JI credits transacted in 2004 was EUR 245m; it is estimated that more than EUR 620m worth of credits were transacted in 2005.

Several non-Kyoto carbon markets are already in existence as well, and these are likely to grow in importance and numbers in the coming years. These include the New South Wales Greenhouse Gas Abatement Scheme, the Regional Greenhouse Gas Initiative (RGGI) in the United States, the Chicago Climate Exchange, the State of California’s recent initiative to reduce emissions, the commitment of 131 US mayors to adopt Kyoto targets for their cities, and the State of Oregon’s emissions abatement programme.

Taken together, these initiatives point to a series of linked markets, rather than a single carbon market. The common theme across most of them is the adoption of market-based mechanisms centered on Carbon Credits that represent a ton of CO2 emission reduced. The fact that most of these initiatives have similar approaches to certifying their credits makes it conceivable that Carbon Credits in one market may in the long run be tradable in most other schemes. This would broaden the current carbon market far more than the current focus on the CDM/JI and EU ETS domains. An obvious precondition, however, is a realignment of penalties and fines to similar levels, since these create an effective ceiling for each market.

Revisions

The protocol left several issues open to be decided later by the Conference of Parties (COP). COP6 attempted to resolve these issues at its meeting in the Hague in late 2000, but was unable to reach an agreement due to disputes between the European Union on the one hand (which favoured a tougher agreement) and the United States, Canada, Japan and Australia on the other (which wanted the agreement to be less demanding and more flexible).

In 2001, a continuation of the previous meeting (COP6bis) was held in Bonn where the required decisions were adopted. After some concessions, the supporters of the protocol (led by the European Union) managed to get Japan and Russia in as well by allowing more use of carbon dioxide sinks.

COP7 was held from 29 October 2001 – 9 November 2001 in Marrakech to establish the final details of the protocol.

The first Meeting of the Parties to the Kyoto Protocol (MOP1) was held in Montreal from November 28 to December 9, 2005, along with the 11th conference of the Parties to the UNFCCC (COP11). See United Nations Climate Change Conference.

Position of Russia
Vladimir Putin approved the treaty on November 4, 2004 and Russia officially notified the United Nations of its ratification on November 18, 2004. With that, the Russian ratification is complete. The issue of Russian ratification was particularly closely watched in the international community, as the accord was brought into force 90 days after Russian ratification (February 19, 2005).

President Putin had earlier decided in favour of the protocol in September 2004, along with the Russian cabinet Mosnews.com. As anticipated after this, ratification by the lower (22 October 2004) and upper house of parliament did not encounter any obstacles.

The Kyoto Protocol limits emissions to a percentage increase or decrease from their 1990 levels. Since 1990 the economies of most countries in the former Soviet Union have collapsed, as have their greenhouse gas emissions. Because of this, Russia should have no problem meeting its commitments under Kyoto, as its current emission levels are substantially below its targets

It is debatable whether Russia will benefit from selling emissions credits to other countries in the Kyoto Protocol [1].

 
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