Carbon Market
The carbon market is a global market that is growing as a result of increasing acceptance of the reality of climate change. The 1992 UN Framework Convention on Climate Change (UNFCCC) and subsequent Kyoto Protocol allocate industrialized countries the main responsibility for mitigating climate change (article link). The carbon market is providing a framework and price mechanism to reduce carbon emissions as a response to climate change.
The reduction targets established in the Kyoto Protocol can be met by reducing domestic GHG emissions, or by utilizing three flexible mechanisms allowed under the Kyoto Protocol: Emissions Trading, Clean Development Mechanism (CDM) and Joint Implementation (JI). These mechanisms make up the bulk of the carbon market. Allowance based markets are dominated by the EU Emissions Trading Scheme (EU ETS) and project mechanisms are dominated by the CDM.
The EU ETS is an EU wide cap and trade scheme that covers the electricity generating industries and larger industrial installations with high GHG emissions. The scheme delivers a set level of emissions reduction. The idea behind this trading scheme is that companies with low abatement costs reduce emissions first thereby delivering the lowest cost to the economy. The scheme has a strong compliance framework and has provided the market with a carbon price signal.
CDM enables developed countries to finance projects that avoid GHG emissions in developing countries and thereby receive credits that they may use to help meet mandatory limits on their own emissions. All countries in Asia except Japan are potential host countries for CDM projects. Asian countries dominate the CDM market with approximately 70% of Certified Emission Reductions (CERs) by volume produced in China and India. The initial batch of projects has focused on GHGs that have a CO2 equivalent factor of greater than 1 as these projects result in higher volumes of CERs and are therefore more viable. Project types include powerstation fuel
switching, landfill gas capture for flaring and electricity generation, HFC
scrubbing and material replacement in cement manufacture.
JI projects share similarities with CDM
projects, however under JI projects a developed country receives Emissions
Reduction Units (ERUs) in return for financing projects that reduce GHG
emissions. These projects can be located in another developed country or in
an economy in transition.
A smaller aspect of the market is made up of the voluntary sector serving companies and individuals wishing to reduce their carbon footprint. This sector is made up of
credits from above mentioned projects and projects that do not meet the
Kyoto Protocol rules but still deliver carbon emission reductions. These
carbon credits generally yield a lower price as a result of less stringent
verification and control.
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