The Kyoto Protocol, signed in December 1997, was the first international mechanism designed to reduce greenhouse gas emissions by putting a price on carbon. Over the past few years, a variety of initiatives launched by regions, major cities, large companies and associations have built on this original intergovernmental approach.
The Initial Market Created by the Kyoto Protocol
The Kyoto ProtocolInternational agreement linked to the United Nations Framework Convention on Climate Change... established the first mechanisms for reducing greenhouse gas (ghg) Gas with physical properties that cause the Earth's atmosphere to warm up. There are a number of naturally occurring greenhouse gases... (GHG) emissions by allocating a certain number of emission allowances per country. Acknowledging the fact that not all countries had the same historical responsibility for the buildup of greenhouse gases in the atmosphere, the Kyoto Protocol set reduction targets for some forty industrialized nations belonging to the Organisation for Economic Co-operation and Development (OECDFounded in 1960, the OECD promotes policies that will improve the economic and social well-being of people around the world... ) or the former Eastern Bloc. These countries were known as Annex 1 Parties.
To demonstrate solidarity with developing nations and facilitate transfers of technology, the Protocol also included a Clean Development Mechanism through which an Annex 1 country could invest in emissions reduction projects in a Non-Annex country and receive a certified emission reduction (CER) credit.
The objective of a 5% reduction in Annex 1 country emissions from 1990 levels by 2012 was more than met, with an overall decrease of 24%. On closer inspection, however, this performance looks less impressive:
- The industrial sector in the former Eastern Bloc countries collapsed in the 1990s after the break-up of the Soviet Union, automatically reducing their carbon dioxide emissions.
- The 2008 economic crisis helped reduce emissions in the developed world.
- Developed countries became more service-based and transferred a significant portion of their heavily emitting industries to emerging markets.
- The world's two largest emitters – China and the United States – did not take part in the initial carbon market.
- Most importantly, the world changed. In 1990, Annex I countries were responsible for 60% of global emissions and developing countries for the remaining 40 %, whereas today, the situation is reversed1.
In 1990, industrialized nations accounted for 60% of global CO2 emissions, while developing countries accounted for 40%. Today, the situation is reversed.
A Bottom-Up Approach
Over the years, a variety of mechanisms have emerged outside of multilateral negotiations among nations to "put a price on carbon" (See Close-Up: "Mechanisms for "Putting a Price on Carbon"), creating a bottom-up approach alongside the initial top-down system.
Today, outside the Kyoto measures, more than 40 countries and more than 20 cities, states and provinces representing nearly a quarter of global GHG emissions have deployed or are preparing various types of carbon markets or carbon taxes. Numerous institutions and more than 1,000 major corporations and investors have expressed support for carbon pricing. According to the World Bank, all of these measures taken together will soon cover close to half of the world's CO2See Carbon Dioxid emissions2.
- Europe was the first region to set up a carbon market (See Close-Up: Carbon: "The European Emissions Trading Market").
- China has opened seven carbon markets covering four cities (Shenzhen, Shanghai, Beijing and Tinjin) and three provinces (Guangdong, Hubei and Chonqing). Together, they comprise the second largest carbon market after Europe. China plans to create a national market as of 2017.
- Other projects began to develop locally starting in 2003 in the United States, Japan and New Zealand. The State of California began a cap-and-trade program in December 2012. Several States in the Pacific Northwest, including Oregon and Washington, followed suit and links have been established with Canadian carbon markets in Quebec and British Colombia.
- Several countries have adopted carbon taxes. The Scandinavians have been pioneers in this area. In particular Norway, a major oil and gas producer, has implemented a very high tax to add to its sovereign wealth fund (See Saga: "The History of Energy in Norway"). In France, a "climate-energy contribution" has been tacked onto domestic taxes on fossil fuels.
- In June 2015, the world's six largest oil and and gas companies called for the implementation of carbon pricing mechanisms. This may seem paradoxical, given that these same companies will bear much of the burden, but they prefer a uniform situation worldwide rather than a patchwork of solutions so they can take this factor into account in their investments.