Climate change is widely acknowledged to be the most important environmental problem facing humankind. Because the atmosphere knows no boundaries and the world’s economies are linked through trade and capital flows, international cooperation to curb greenhouse gases is essential. The institutional framework for such cooperation is provided by the 1992 United Nations Framework Convention on Climate Change (UNFCCC) which came into force ten years ago and by its supplementary 1997 Kyoto Protocol. The Protocol is one of the most complex treaties ever negotiated. At its core lie legally binding targets for the world’s wealthier countries to reduce greenhouse gas emissions over 2008–2012. Countries with Kyoto targets can achieve these targets through domestic efforts. They can also reduce greenhouse gases (GHG) in other countries at lower cost than at home by making use of the three flexible mechanisms set out in the Protocol: joint implementation (JI), the Clean Development Mechanism (CDM) and international emissions trading (IET). Because the geographic location of GHG emissions is environmentally irrelevant, cost-effectiveness considerations speak for allowing countries to take credit for overseas actions that curb GHG emissions at source or enhance the removal of GHGs by sinks.
Although there are other political, economic, social and ethical reasons for preferring domestic action, one of the most remarkable aspects of the Protocol is how implementation of its flexible mechanisms is proceeding rapidly around the world, ahead of its formal entry into force. One of the Kyoto mechanisms, the CDM, is already being implemented in over 50 developing countries under the legal authority of the Conference of the Parties (COP) of the UNFCCC which is acting as the interim institutional body of the Protocol. More significantly still is the establishment of a scheme for GHG emission allowance trading within the 25 Member States of the European Union (EU) which will formally commence on 1 January 2005. The EU Emission Allowance Trading Scheme (EU ETS) will cover some 15,000 entities with a market potential estimated at euro 10 billion a year. The EU scheme will link with the existing CDM market and the nascent JI market focused on Central and Eastern European countries. Additionally, notwithstanding rejection of the Protocol by the Bush administration, domestic trading and offset schemes are also being devised in other parts of the world, including the US and Australia, that are Kyoto consistent and in many cases actually anticipate future linkages with the Kyoto mechanisms. These developments signify that interest in implementing the Kyoto mechanisms will increase worldwide over time – among Parties and non-Parties to the Protocol, particularly when the Protocol formally enters into force as is now expected in 2005 with the decision by President Putin, backed by The Russian Duma, to ratify the Protocol.
This book is intended to support the implementation and evolution of the climate change regime by providing an accessible account of the rules, procedures and institutions governing access to and use of the Kyoto flexibility mechanisms. These rules span three different legal planes:
• international rules as set out in the Kyoto Protocol and elaborated through decisions taken by the COP of the UNFCCC
• regional rules, principally those agreed by the European Union governing the EU ETS; and
• national schemes, agreed at the federal or state level, establishing trading or offset provisions for national entities.
The carbon markets established by these schemes will interact in complex ways. Cost-minimization will be the core motivation for trades among and across schemes, particularly at the entity level, but legal and institutional provisions, and broader political and strategic considerations, will also play a significant role in determining whether, where, when and how trades take place. One of the strength of this book is that it brings together Kyoto mechanisms developments from the international, EU and national jurisdictions in a single place providing a clear understanding of the linkages between these levels. By doing so, it aims to help the growing community of policy-makers in developed and developing countries understand the rules governing emerging carbon markets and how they will function and evolve in the future. It will therefore be useful for companies, market intermediaries and service providers such as brokers, traders, auditing and certification entities, consultants, law firms and stakeholder organizations already active in the Kyoto markets.