Carbon Markets
The global carbon markets can be grouped under the following categories:
Kyoto Markets
The Kyoto Protocol is a protocol to the United Nations Framework Convention on Climate Change (UNFCCC). It provides for the use of three flexible mechanisms for its signatories:
Emissions Trading: Developed countries which have ratified the Kyoto Protocol (Annex B parties), have accepted targets for limiting or reducing emissions. These targets are expressed as levels of allowed emissions over the 2008-2012 commitment period. The allowed emissions are distributed as tradeable Assigned Amount Units (AAUs), each equal to one tonne of CO2.
Kyoto allows Annex B parties to trade emission reductions via cap-and-trade programs. Additionally, Annex B parties can create Bubbles, i.e. a group of them can sum-up their targets and redistribute them internally. The European Union Emissions Trading Scheme (EU ETS) is an example of a bubble. Affected companies in the EU are issued and trade EU Allowances (EUAs).
Origination and transfers of these units are tracked through national registry systems, which interact via an international transaction log (ITL) to ensure secure transfer of emission reduction units between countries.
Clean Development Mechanism (CDM): Mandated by Article 12 of the Kyoto Protocol, the Clean Development Mechanism allows Annex B parties with an emissions reduction commitment to invest in emissions reduction projects in developing countries as an alternative to more expensive emission reductions in their own countries. Under the CDM, investors from Annex B parties receive tradeable Certified Emissions Reduction units (CERs) for the actual amount of greenhouse gas emissions reduction achieved.
Joint Implementation (JI): Mandated by Article 6 of the Kyoto Protocol, any county with binding and quantified emission caps (Annex I party), can invest in emission reduction projects (referred to as “Joint Implementation Projects”) in any other Annex I country as an alternative to reducing emissions domestically.
JI projects are awarded tradeable Emission Reduction Units (ERUs). One ERU represents an emission reduction equaling one tonne of CO2 equivalent. The ERUs come from the host country’s pool of AAUs to ensure that the total amount of emissions credits among Annex I parties does not change for the duration of the commitment period.
US Compliance Markets
The Regional Greenhouse Gas Initiative (RGGI) is the only compliance greenhouse gas emissions reduction program that’s currently in effect in the United States. Ten states participate in RGGI: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont. These states cap CO2 emissions from the power sector, and require a 10 percent reduction in these emissions by 2018. RGGI provides a market-based emissions auction and trading system where electric power generators can trade CO2 emissions allowances.
Other regional and state-level programs, in addition to RGGI, are currently in planning phases: Western Climate Initiative (WCI), Midwest Climate Initiative (MCI), AB-32 etc.
Voluntary Carbon Markets
There is a fast growing market for carbon credits outside of the compliance carbon markets. Tradeable verified emission reductions (VER), each representing one tonne of CO2 emission reduction are generated according to defined standards and requirements other than the Kyoto Protocol.
A number of standards organizations have emerged which developed the methodology and oversee the overall framework for the validation, verification and issuance of the carbon credits. The vast majority of voluntary carbon credits are issued as:
- Gold Standard VER
- Voluntary Carbon Standard (VCS) VCU
- California Climate Action Registry (CCAR)
- VER+
- Chicago Climate Exchange CFI