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99-649: Although initially somewhat similar to the earlier UK participation in the European Union Emission Trading Scheme (EU ETS), there are differences. The initial cap is 5% lower than the UK’s share under phase four of the EU ETS. The auction reserve price is £22 per tonne, and the government intends legislating for measures to limit price spikes. The UK ETS is initially limited to internal flights, electricity generation and industries which use

198-465: A cap and trade system, with an annually reducing cap. Each participant could then decide to take action to manage its emissions to exactly meet its target, or reduce its actual emissions below its target (thereby releasing allowances that it could sell on, or save for use in future years), or buy allowances from other participants to cover any excess. From March 2002, DEFRA ran an auction of emission allowances to perform allocations to participants, after

297-738: A carbon project that has been certified by the UNFCCC Clean Development Mechanism Executive Board, or Emission Reduction Unit (ERU) certified by the Joint Implementation project's host country or by the Joint Implementation Supervisory Committee, are accepted by the EU as equivalent. Thus one EU Allowance Unit of one tonne of CO 2 , or "EUA", was designed to be identical (" fungible ") with

396-472: A 2006 EUA can be used in 2007 (banking) or in 2005 (borrowing). Interperiod borrowing is not allowed. Member states had the discretion to decide whether banking EUAs from Phase I to Phase II was allowed. The EU ETS operates in 30 countries: the 27 EU member states plus Iceland, Liechtenstein and Norway. The United Kingdom left the EU on 31 January 2020 but remained subject to EU rules until 31 December 2020. The UK Emissions Trading Scheme (UK ETS) replaced

495-399: A cap-and-trade system for fuel suppliers or a baseline-and-credit system for car manufacturers. The National Allocation Plans for Phase II, the first of which were announced on 29 November 2006, provided for an average reduction of nearly 7% below the 2005 emission levels. However, the use of offsets such as Emission Reduction Units from JI and Certified Emission Reductions from CDM projects

594-423: A certain amount of Kyoto certificates from flexible mechanism projects to cover their emissions. The Kyoto flexible mechanisms are: IET is relevant as the reductions achieved through CDM projects are a compliance tool for EU ETS operators. These Certified Emission Reductions (CERs) can be obtained by implementing emission reduction projects in developing countries, outside the EU, that have ratified (or acceded to)

693-433: A given stabilization level, larger emissions reductions in the near term allow for less stringent emissions reductions later. On the other hand, less stringent near term emissions reductions would, for a given stabilization level, require more stringent emissions reductions later on. The first period Kyoto emissions limitations can be viewed as a first-step towards achieving atmospheric stabilization of GHGs. In this sense,

792-693: A high carbon price. For each EU ETS Phase, the total quantity to be allocated by each Member State is defined in the National Allocation Plan (equivalent to its UNFCCC-defined carbon account). The European Commission has oversight of the NAP process and decides if the NAP satisfies the twelve criteria set out in Annex ;III of the Emission Trading Directive (EU Directive 2003/87/EC). The first and foremost criterion

891-503: A hypothetical baseline of emissions. Only emission reduction projects that do not involve using nuclear energy are eligible for accreditation under the CDM, in order to prevent nuclear technology exports from becoming the default route for obtaining credits under the CDM. Each Annex I country is required to submit an annual report of inventories of all anthropogenic greenhouse gas emissions from sources and removals from sinks under UNFCCC and

990-643: A large number of futures and options. The price of allowances increased more or less steadily to a peak level in April 2006 of about €30 per tonne CO 2 . In late April 2006, several EU countries (the Netherlands , the Czech Republic , Belgium , France , and Spain ) announced that their verified (or actual) emissions were less than the number of allowances allocated to installations. The spot price for EU allowances dropped 54% from €29.20 to €13.35 in

1089-407: A lot of energy: but the scheme will be expanded. As of 2021 international carbon offsets are not permitted. As of 2021 the fine for exceeding allowances is £100 per tonne. The former UK Emissions Trading Scheme was a voluntary emissions trading system created as a pilot prior to the mandatory EUETS. It ran from 2002 and it closed to new entrants in 2009. Management of the scheme transferred to

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1188-573: A maximum (cap) is set on the total amount of greenhouse gases that can be emitted by all participating installations. EU Allowances for emissions are then auctioned off or allocated for free, and can subsequently be traded. Installations must monitor and report their CO 2 emissions, ensuring they hand in enough allowances to the authorities to cover their emissions. To exceed its emissions allowance, an installation must purchase allowances from others. Conversely, if an installation emits less than its allowance, it can sell its leftover credits. This allows

1287-410: A more stable carbon market. Linking systems can also be politically symbolic as it shows willingness to undertake a common effort to reduce GHG emissions. Some scholars have argued that linking may provide a starting point for developing a new, bottom-up international climate policy architecture whereby multiple unique systems successively link their various systems. In the first phase (2005–2007),

1386-703: A new EU ETS2. The "old" ETS and the new EU ETS2 allowances will be traded independently. A major difference to the ETS is that ETS2 will cover the CO2 emissions upstream - whereby accredited fuel suppliers who places the fuel on the EU market will be obliged to cover that fuel with ETS2 emission allowances. The ETS2 covers around 40% of the EU's greenhouse gas emissions. The scheme has been divided into four "trading periods". The first ETS trading period lasted three years, from January 2005 to December 2007. The second trading period ran from January 2008 until December 2012, coinciding with

1485-655: A quantitative total limit on the emissions produced by all participating emitters, which correspondingly determines the prices of emissions. Under emission trading, a polluter having more emissions than their quota has to purchase the right to emit more from emitters with fewer emissions. This can reduce the competitiveness of fossil fuels , which are the main driver of climate change . Instead, carbon emissions trading may accelerate investments into renewable energy , such as wind power and solar power . However, such schemes are usually not harmonized with defined carbon budgets that are required to maintain global warming below

1584-420: A second commitment period. The first period emission reduction commitments expired on 31 December 2012. The first-round Kyoto emissions limitation commitments were not sufficient to stabilize the atmospheric concentration of GHGs. Stabilization of atmospheric GHG concentrations will require further emissions reductions after the end of the first-round Kyoto commitment period in 2012. The ultimate objective of

1683-600: A surplus of allowances, while many OECD countries have a deficit. Some of the EITs with a surplus regard it as potential compensation for the trauma of their economic restructuring. When the Kyoto treaty was negotiated, it was recognized that emissions targets for the EITs might lead to them having an excess number of allowances. This excess of allowances were viewed by the EITs as "headroom" to grow their economies. The surplus has, however, also been referred to by some as "hot air",

1782-456: A temporary subsidy for affected industries, but does not fix the underlying problem. Border adjustments would be the economically efficient choice, where imports are taxed according to their carbon content. One problem with border adjustments is that they might be used as a disguise for trade protectionism . Some adjustments may also not prevent emissions leakage. Within a certain trading period, banking and borrowing are allowed. For example,

1881-431: A term which Russia (a country with an estimated surplus of 3.1 billion tonnes of carbon dioxide equivalent allowances) views as "quite offensive". OECD countries with a deficit could meet their Kyoto commitments by buying allowances from transition countries with a surplus. Unless other commitments were made to reduce the total surplus in allowances, such trade would not actually result in emissions being reduced (see also

1980-469: Is a carbon emission trading scheme (or cap and trade scheme ) that began in 2005 and is intended to lower greenhouse gas emissions in the EU. Cap and trade schemes limit emissions of specified pollutants over an area and allow companies to trade emissions rights within that area. The ETS covers around 45% of the EU's greenhouse gas emissions. As from 2027 road transport and buildings and industrial installation that fell out of EU ETS will be covered by

2079-738: Is proposed, the National Emissions Trading Registry and the European Commission are informed so they can validate the transaction. During Phase II of the EU ETS, the UNFCCC also validates the allowance and any change that alters the distribution within each National allocation plan. Like the Kyoto trading scheme, EU ETS allows a regulated operator to use carbon credits in the form of Emission Reduction Units (ERU) to comply with its obligations. A Kyoto Certified Emission Reduction unit (CER), produced by

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2178-509: Is that the marginal cost of reducing (or abating) emissions differs among countries. "Marginal cost" is the cost of abating the last tonne of CO 2 -eq for an Annex I/non-Annex I Party. At the time of the original Kyoto targets, studies suggested that the flexibility mechanisms could reduce the overall ( aggregate ) cost of meeting the targets. Studies also showed that national losses in Annex I gross domestic product (GDP) could be reduced by

2277-793: Is that the proposed total quantity is in line with a Member State's Kyoto target. Of course, the Member State's plan can, and should, also take account of emission levels in other sectors not covered by the EU ETS, and address these within its domestic policies. For instance, transport is responsible for 21% of EU greenhouse gas emissions, households, and small businesses for 17% and agriculture for 10%. During Phase I, most allowances in all countries were given freely (known as grandfathering ). This approach has been criticized as giving rise to windfall profits , being less efficient than auctioning, and providing too little incentive for innovative new competition to provide clean, renewable energy. On

2376-625: Is the largest multi-national, greenhouse gas emissions trading scheme in the world. After voluntary trials in the UK and Denmark , Phase I began operation in January 2005 with all 15 member states of the European Union participating. The program caps the amount of carbon dioxide that can be emitted from large installations with a net heat supply over 20 MW, such as power plants and carbon intensive factories, and covers almost half (46%) of

2475-692: The Commission said it would delay the auctioning of some allowances. In 2015, Decision (EU) 2015/1814 was approved to establish a Market Stability Reserve that adjusts the annual supply of CO 2 permits based on the CO 2 permits in circulation in the previous year. In 2018, the Market Stability Reserve was amended by Directive (EU) 2018/410 so that a certain amount of permits inside the reserve would be cancelled from 2023 onwards. In January 2008, Norway, Iceland, and Liechtenstein joined

2574-481: The Department of Energy and Climate Change in 2008. At the time, the scheme was a novel economic approach, being the first multi-industry carbon trading system in the world. (Denmark ran a pilot greenhouse gas trading scheme between 2001 and 2003 but this only involved eight electricity companies). It took note of the emerging international consensus on the benefits of carbon trading that were being proposed in

2673-539: The European Green Deal necessitates tightening of the current EU ETS reduction target for 2030 of -43% concerning to 2005. The EU Commission proposes in its "Fit for 55" package to increase the EU ETS reduction target for 2030 to −61% compared to 2005. EU countries view the emissions trading scheme as necessary for meeting climate goals. A strong carbon market guides investors and industry in their transition from fossil fuels . A 2020 study found that

2772-544: The European Union (and its then 28 member states , now 27), Belarus , Iceland , Kazakhstan , Liechtenstein , Norway , Switzerland , and Ukraine . Belarus, Kazakhstan, and Ukraine stated that they may withdraw from the Kyoto Protocol or not put into legal force the Amendment with second round targets. Japan, New Zealand , and Russia had participated in Kyoto's first-round but did not take on new targets in

2871-506: The European Union participated, nominally commenced operation on 1 January 2005, although national registries were unable to settle transactions for the first few months. However, the prior existence of the UK Emissions Trading Scheme meant that market participants were already in place and ready. In its first year, 362 million tonnes of CO 2 were traded on the market for a sum of €7.2 billion, and

2970-760: The 2015 adoption of the Paris Agreement , which is a separate instrument under the UNFCCC rather than an amendment of the Kyoto Protocol. 1992 – The UN Conference on the Environment and Development is held in Rio de Janeiro. It results in the Framework Convention on Climate Change (UNFCCC) among other agreements. 1995 – Parties to the UNFCCC meet in Berlin (the 1st Conference of Parties (COP) to

3069-555: The CDM and JI can be used by Annex I Parties in meeting their emission limitation commitments. The emission reductions produced by the CDM and JI are both measured against a hypothetical baseline of emissions that would have occurred in the absence of a particular emission reduction project. The emission reductions produced by the CDM are called Certified Emission Reductions (CERs); reductions produced by JI are called emission reduction units (ERUs). The reductions are called " credits " because they are emission reductions credited against

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3168-693: The CDM. Russia accounts for about two-thirds of these savings, with the remainder divided up roughly equally between Ukraine and the EU's New Member States. Emission savings include cuts in methane, HFC, and N 2 O emissions. The agreement is a protocol to the United Nations Framework Convention on Climate Change (UNFCCC) adopted at the Earth Summit in Rio de Janeiro in 1992, which did not set any legally binding limitations on emissions or enforcement mechanisms. Only Parties to

3267-528: The Caribbean make up 15% of the potential total, with Brazil as the largest producer in the region (7%). The formal crediting period for Joint Implementation (JI) was aligned with the first commitment period of the Kyoto Protocol, and did not start until January 2008 (Carbon Trust, 2009, p. 20). In November 2008, only 22 JI projects had been officially approved and registered. The total projected emission savings from JI by 2012 are about one tenth that of

3366-502: The Doha Amendment. It entered into force on 31 December 2020, following its acceptance by the mandated minimum of at least 144 states, although the second commitment period ended on the same day. Of the 37 parties with binding commitments, 34 had ratified. Negotiations were held in the framework of the yearly UNFCCC Climate Change Conferences on measures to be taken after the second commitment period ended in 2020. This resulted in

3465-492: The ETS may reassign or trade their allowances by several means: Like any other financial instrument , trading consists of matching buyers and sellers between members of the exchange and then settling by depositing a valid allowance in exchange for the agreed financial consideration. Much like a stock market , companies and private individuals can trade through brokers who are listed on the exchange, and need not be regulated operators. When each change of ownership of an allowance

3564-415: The EU ETS had reduced CO 2 emissions by more than 1 billion tons between 2008 and 2016 or 3.8% of total EU-wide emissions. The EU ETS has seen a number of significant changes, with the first trading period described as a "learning by doing" phase. Phase III saw a turn to auctioning more permits rather than allocating freely (in 2013, over 40% of the allowances were auctioned ); harmonisation of rules for

3663-455: The EU ETS has incidentally contributed to reduce atmospheric levels of air pollutants in the EU including sulfur dioxide, fine particulate matter, and nitrogen oxide. This reduction has translated in local health co-benefits, alongside the system's primary goal of mitigating climate change. The EU Emission Trading System follows the cap and trade model where one allowance permits the holder to emit 1 ton of CO 2 (tCO 2 ). Under this scheme,

3762-454: The EU ETS included some 12,000 installations, representing approximately 40% of EU CO 2 emissions, covering energy activities (combustion installations with a rated thermal input exceeding 20  MW , mineral oil refineries, coke ovens), production and processing of ferrous metals, mineral industry (cement clinker, glass and ceramic bricks) and pulp, paper and board activities. The ETS, in which all 15 Member States that were then members of

3861-554: The EU ETS successfully reduced CO 2 emissions even though the prices for carbon were set at low prices. A review of 13 policy evaluations quantifies this emission reduction effect at 7%. A 2023 study on the effects of the EU ETS identified a reduction in carbon emissions in the order of -10% between 2005 and 2012 with no impacts on profits or employment for regulated firms. The price of EU allowances exceeded 100€/tCO 2 ($ 118) in February 2023. A 2024 study further demonstrated that

3960-458: The EU ETS, the operators within each Member State must surrender their allowances for inspection by the EU before they can be "retired" by the UNFCCC . The total number of permits issued (either auctioned or allocated) determines the supply of the allowances. The actual price is determined by the market. Too many allowances compared to demand will result in a low carbon price, and reduced emission abatement efforts. Too few allowances will result in

4059-455: The EU's Carbon Dioxide emissions. Phase I permits participants to trade among themselves and in validated credits from the developing world through Kyoto's Clean Development Mechanism . Credits are gained by investing in clean technologies and low-carbon solutions, and by certain types of emission-saving projects around the world to cover a proportion of their emissions. The EU-ETS was the first large greenhouse gas emissions trading scheme in

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4158-411: The EU's anthropogenic emissions of CO 2 and 40% of its total greenhouse gas emissions . The EU had set a target for 2020 to cut greenhouse gas emissions by 20% compared with 1990, to reduce energy consumption by 20% compared to the 2007 baseline scenario, and to achieve a 20% share of gross final energy consumption from renewable energy sources—all of which was achieved. A 2020 study estimated that

4257-574: The EU-ETS turned an expected increase in emissions of 1–2% per year into a small absolute decline. Grubb et al. (2009) suggested that a reasonable estimate for the emissions cut achieved during its first two years of operation was 50–100 MtCO 2 per year, or 2.5–5%. On 27 April 2012, the European Commission announced the full activation of the EU Emissions Trading System single registry. The full activation process included

4356-443: The EU. Leakage is the effect of emissions increasing in countries or sectors that have weaker regulation of emissions than the regulation in another country or sector. Such concerns affect the following sectors: cement, steel, aluminium, pulp and paper , basic inorganic chemicals and fertilisers /ammonia. Leakage from these sectors was thought to be under 1% of total EU emissions. Correcting for leakage by allocating permits acts as

4455-505: The European Union Emission Trading Scheme. China threatened to withhold $ 60 billion in outstanding orders from Airbus, which in turn led to France pressuring the EU to freeze the scheme. The EU insisted that the regulation should be applied equally to all carriers and that it did not contravene international regulations. In the absence of a global agreement on airline emissions, the EU argued that it

4554-569: The European Union Emissions Trading System (EU-ETS). The Norwegian Ministry of the Environment has also released its draft National Allocation Plan which provides a carbon cap-and-trade of 15 million tonnes of CO 2 , 8 million of which are set to be auctioned. According to the OECD Economic Survey of Norway 2010, the nation "has announced a target for 2008–12 10% below its commitment under

4653-497: The GIS is not required under the Kyoto Protocol, and there is no official definition of the term. Under the GIS a party to the protocol expecting that the development of its economy will not exhaust its Kyoto quota, can sell the excess of its Kyoto quota units (AAUs) to another party. The proceeds from the AAU sales should be "greened", i.e. channelled to the development and implementation of

4752-592: The Kyoto Protocol and a 30% cut compared with 1990 by 2020." In 2012, EU-15 emissions was 15.1% below their base year level. Based on figures for 2012 by the European Environment Agency , EU-15 emissions averaged 11.8% below base-year levels during the 2008–2012 period. This means the EU-15 over-achieved its first Kyoto target by a wide margin. The first phase of EU ETS was created to operate apart from international climate change treaties such as

4851-541: The Kyoto Protocol was to control emissions of the main anthropogenic (human-emitted) greenhouse gases (GHGs) in ways that reflect underlying national differences in GHG emissions, wealth, and capacity to make the reductions. The treaty follows the main principles agreed in the original 1992 UN Framework Convention. According to the treaty, in 2012, Annex I Parties who have ratified the treaty must have fulfilled their obligations of greenhouse gas emissions limitations established for

4950-591: The Kyoto Protocol's first commitment period (2008–2012). These emissions limitation commitments are listed in Annex B of the Protocol. The Kyoto Protocol's first round commitments are the first detailed step taken within the UN Framework Convention on Climate Change. The Protocol establishes a structure of rolling emission reduction commitment periods. It set a timetable starting in 2006 for negotiations to establish emission reduction commitments for

5049-666: The Kyoto Protocol. The implementation of Clean Development Projects is largely specified by the Marrakech Accords , a follow-on set of agreements by the Conference of the Parties to the Kyoto Protocol. The legislators of the EU ETS drew up the scheme independently but called on the experiences gained during the running of the voluntary UK Emissions Trading Scheme in the previous years, and collaborated with other parties to ensure its units and mechanisms were compatible with

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5148-511: The Kyoto Protocol. These countries nominate a person (called a "designated national authority") to create and manage its greenhouse gas inventory . Virtually all of the non-Annex I countries have also established a designated national authority to manage their Kyoto obligations, specifically the "CDM process". This determines which GHG projects they wish to propose for accreditation by the CDM Executive Board. Emissions trading sets

5247-781: The Protocol. Annex I Parties use of forest management in meeting their targets is capped. Under the Kyoto Protocol, 37 industrialized countries and the European Community (the European Union -15, made up of 15 states at the time of the Kyoto negotiations) commit themselves to binding targets for GHG emissions. The targets apply to the four greenhouse gases carbon dioxide (CO 2 ), methane ( CH 4 ), nitrous oxide ( N 2 O ), sulphur hexafluoride ( SF 6 ), and two groups of gases, hydrofluorocarbons (HFCs) and perfluorocarbons (PFCs). The six GHG are translated into CO 2 equivalents in determining reductions in emissions. These reduction targets are in addition to

5346-536: The UK's participation in the EU ETS on 1 January 2021, but the UK government required organisations to continue to comply with their existing obligations under the 2020 scheme year, which ended on 30 April 2021. The EU ETS is linked to the Swiss Emissions Trading System  [ de ] since 1 January 2020. Linking systems creates a larger carbon market, which can reduce overall compliance costs, increase market liquidity and generate

5445-486: The UNFCCC can become Parties to the Kyoto Protocol. The Kyoto Protocol was adopted at the third session of the Conference of Parties to the UNFCCC in 1997 in Kyoto, Japan. National emission targets specified in the Kyoto Protocol exclude international aviation and shipping. Kyoto Parties can use land use , land use change , and forestry (LULUCF) in meeting their targets. LULUCF activities are also called "sink" activities. Changes in sinks and land use can have an effect on

5544-470: The UNFCCC is the "stabilization of greenhouse gas concentrations in the atmosphere at a level that would stop dangerous anthropogenic interference with the climate system." Even if Annex I Parties succeed in meeting their first-round commitments, much greater emission reductions will be required in future to stabilize atmospheric GHG concentrations. For each of the different anthropogenic GHGs, different levels of emissions reductions would be required to meet

5643-502: The UNFCCC) to outline specific targets on emissions. 1997 – In December the parties conclude the Kyoto Protocol in Kyoto, Japan, in which they agree to the broad outlines of emissions targets. 2004 – Russia and Canada ratify the Kyoto Protocol to the UNFCCC bringing the treaty into effect on 16 February 2005. 2011 – Canada became the first signatory to announce its withdrawal from the Kyoto Protocol. 2012 – On 31 December 2012,

5742-725: The United States reacted adversely to the inclusion of the aviation sector. The United States and other countries argued that the EU did not have jurisdiction to regulate flights when they were not in European skies; China and the United States threatened to ban their national carriers from complying with the scheme. On 27 November 2012, the United States enacted the European Union Emissions Trading Scheme Prohibition Act of 2011 which prohibits U.S. carriers from participating in

5841-427: The base year level), while others have limitations above the base year level. Emission limits do not include emissions by international aviation and shipping. Although Belarus and Turkey are listed in the convention's Annex I, they do not have emissions targets as they were not Annex I Parties when the Protocol was adopted. Kazakhstan does not have a target, but has declared that it wishes to become an Annex I Party to

5940-742: The cap is expected to result in an emissions reduction in 2010 of about 2.4% compared to expected emissions without the cap (business-as-usual emissions). Aviation emissions were to be included from 2012. The inclusion of aviation was considered important by the EU. The inclusion of aviation was estimated to increase in demand for allowances by about 10–12 million tonnes of CO 2 per year in phase two. According to DEFRA, increased use of JI credits from projects in Russia and Ukraine would offset any increase in prices so there would be no discernible impact on average annual CO 2 prices. The airline industry and other countries including China, India, Russia, and

6039-513: The climate, and indeed the Intergovernmental Panel on Climate Change 's Special Report on Land use, land-use change, and forestry estimates that since 1750 a third of global warming has been caused by land use change. Particular criteria apply to the definition of forestry under the Kyoto Protocol. Forest management , cropland management, grazing land management, and revegetation are all eligible LULUCF activities under

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6138-499: The convention (the non-Annex I Parties) are mostly low-income developing countries, and may participate in the Kyoto Protocol through the Clean Development Mechanism (explained below). The emissions limitations of Annex I Parties varies between different Parties. Some Parties have emissions limitations reduce below the base year level, some have limitations at the base year level (no permitted increase above

6237-784: The critical thresholds of 1.5 °C or "well below" 2 °C, with oversupply leading to low prices of allowances with almost no effect on fossil fuel combustion. Emission trade allowances currently cover a wide price range from €7 per tonne of CO 2 in China's national carbon trading scheme to €63 per tonne of CO 2 in the EU-ETS (as of September 2021). The design of the European Union Emissions Trading Scheme (EU ETS) implicitly allows for trade of national Kyoto obligations to occur between participating countries. The Carbon Trust found that other than

6336-525: The current levels of greenhouse gases in the atmosphere. The Protocol's first commitment period started in 2008 and ended in 2012. All 36 countries that fully participated in the first commitment period complied with the Protocol. However, nine countries had to resort to the flexibility mechanisms by funding emission reductions in other countries because their national emissions were slightly greater than their targets. The financial crisis of 2007–08 reduced emissions. The greatest emission reductions were seen in

6435-549: The design agreed through the UNFCCC. Under the EU ETS, the governments of the EU Member States agree on national emission caps which have to be approved by the EU Commission. Those countries then allocate allowances to their industrial operators and track and validate the actual emissions per the relevant assigned amount. They require the allowances to be retired after the end of each year. The operators within

6534-530: The end of the first Kyoto commitment period, the CDM is expected to produce some 1.5 billion tons of carbon dioxide equivalent (CO 2 e) in emission reductions. Most of these reductions are through renewable energy commercialisation , energy efficiency , and fuel switching (World Bank, 2010, p. 262). By 2012, the largest potential for production of CERs are estimated in China (52% of total CERs) and India (16%). CERs produced in Latin America and

6633-472: The equivalent " assigned amount units " (AAU) of CO 2 defined under Kyoto. Hence, because the EU decided to accept Kyoto-CERs as equivalent to EU-EUAs, it is possible to trade EUAs and UNFCCC-validated CERs on a one-to-one basis within the same system. (However, the EU was not able to link trades from all its countries until 2008-9 because of its technical problems connecting to the UN systems). During Phase II of

6732-599: The first commitment period of the Kyoto Protocol . The third trading period lasted from January 2013 to December 2020. Compared to 2005, when the EU ETS was first implemented, the proposed caps for 2020 represent a 21% reduction of greenhouse gases. This target was achieved six years early as emissions in the ETS fell to 1.812 billion (10 ) tonnes in 2014. The fourth phase started in January 2021 and will continue until December 2030. The emission reductions to be achieved over this period are unclear as of November 2021, as

6831-513: The first commitment period under the Protocol expired. The official meeting of all states party to the Kyoto Protocol is the annual Conference of the Parties (COP) to the United Nations Framework Convention on Climate Change (UNFCCC). The first conference was held in 1995 in Berlin ( COP 1 ). The first Meeting of Parties of the Kyoto Protocol (CMP) was held in 2005 in conjunction with COP 11 . The main goal of

6930-702: The first period Kyoto commitments may affect what future atmospheric stabilization level can be achieved. Some of the principal concepts of the Kyoto Protocol are: The Protocol defines three " flexibility mechanisms " that can be used by Annex I Parties in meeting their emission limitation commitments. The flexibility mechanisms are International Emissions Trading (IET), the Clean Development Mechanism (CDM), and Joint Implementation (JI). IET allows Annex I Parties to "trade" their emissions ( Assigned Amount Units , AAUs, or "allowances" for short). The economic basis for providing this flexibility

7029-500: The former Eastern Bloc countries because the dissolution of the Soviet Union reduced their emissions in the early 1990s. Even though the 36 developed countries reduced their emissions, the global emissions increased by 32% from 1990 to 2010. A second commitment period was agreed to in 2012 to extend the agreement to 2020, known as the Doha Amendment to the Kyoto Protocol, in which 37 countries had binding targets: Australia ,

7128-482: The future phases. This free allocation resulted in the volume and value of allowances growing three-fold over 2006 with the price moving from €19/tCO 2 in 2005 to its peak of €30/tCO 2 which revealed a new problem. The overallocation of allowances caused the price to drop to €1/tCO 2 in the first few months of 2007 which created market price instabilities for businesses to reinvest in low carbon-technologies. The European Union Emission Trading Scheme (or EU-ETS)

7227-480: The industrial gases, chlorofluorocarbons , or CFCs, which are dealt with under the 1987 Montreal Protocol on Substances that Deplete the Ozone Layer . Under the Protocol, only the Annex I Parties have committed themselves to national or joint reduction targets (formally called "quantified emission limitation and reduction objectives" (QELRO) – Article 4.1). Parties to the Kyoto Protocol not listed in Annex I of

7326-590: The last week of April 2006. In May 2006, the European Commission confirmed that verified CO 2 emissions were about 80 million tonnes or 4% lower than the number of allowances distributed to installations for 2005 emissions. In May 2006, prices fell to under €10/tonne. Lack of scarcity under the first phase of the system continued through 2006 resulting in a trading price of €1.2 per tonne in March 2007, declining to €0.10 in September 2007. In 2007, carbon prices for

7425-504: The mandatory Kyoto Protocol , which had not been ratified at that time, and allowed government and corporate early movers and to gain experience in the auction process and the trading system that the later schemes have entailed. It ran in parallel with a tax on energy use, the Climate Change Levy , introduced in April 2001, but companies could get a discount on the tax if they elected to make reductions through participation in

7524-527: The migration of over 30,000 EU ETS accounts from national registries. The European Commission further stated that the single registry to be activated in June will not contain all the required functionalities for phase III of the EU ETS. Phase II saw some tightening, but the use of JI and CDM offsets was allowed, with the result that no reductions in the EU will be required to meet the Phase II cap. For Phase II,

7623-443: The objective of stabilizing atmospheric concentrations . Carbon dioxide (CO 2 ) is the most important anthropogenic GHG. Stabilizing the concentration of CO 2 in the atmosphere would ultimately require the effective elimination of anthropogenic CO 2 emissions. To achieve stabilization, global GHG emissions must peak, then decline. The lower the desired stabilization level, the sooner this peak and decline must occur. For

7722-416: The other hand, allocation rather than auctioning may be justified for a few sectors that face international competition like the aluminium and steel industries. To address these problems, the European Commission proposed various changes in a January 2008 package, including the abolishment of NAPs in 2013 and auctioning a far greater share (ca. 60% in 2013, growing afterwards) of emission permits. From

7821-437: The pre-existing United Nations Framework Convention on Climate Change (UNFCCC, 1992) or the Kyoto Protocol that was subsequently (1997) established under it. When the Kyoto Protocol came into force on 16 February 2005, Phase I of the EU ETS had already become operational. The EU later agreed to incorporate Kyoto flexible mechanism certificates as compliance tools within the EU ETS. The "Linking Directive" allows operators to use

7920-535: The projects either acquiring the greenhouse gases emission reductions (hard greening) or building up the necessary framework for this process (soft greening). Latvia was one of the front-runners of GISs. World Bank (2011) reported that Latvia has stopped offering AAU sales because of low AAU prices. In 2010, Estonia was the preferred source for AAU buyers, followed by the Czech Republic and Poland. Japan's national policy to meet their Kyoto target includes

8019-681: The protocol, effective December 2012) to the Protocol in 2020. The Kyoto Protocol implemented the objective of the UNFCCC to reduce the onset of global warming by reducing greenhouse gas concentrations in the atmosphere to "a level that would prevent dangerous anthropogenic interference with the climate system" (Article 2). The Kyoto Protocol applied to the seven greenhouse gases listed in Annex A: carbon dioxide (CO 2 ) , methane (CH 4 ) , nitrous oxide (N 2 O) , hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), sulfur hexafluoride (SF 6 ) , nitrogen trifluoride (NF 3 ) . Nitrogen trifluoride

8118-509: The purchase of AAUs sold under GISs. In 2010, Japan and Japanese firms were the main buyers of AAUs. In terms of the international carbon market, trade in AAUs are a small proportion of overall market value. In 2010, 97% of trade in the international carbon market was driven by the European Union Emission Trading Scheme (EU ETS). Between 2001, which was the first year Clean Development Mechanism (CDM) projects could be registered, and 2012,

8217-461: The remaining allocations; and the inclusion of other greenhouse gases, such as nitrous oxide and perfluorocarbons . In 2012, the EU ETS was also extended to the airline industry, though this only applies within the EEA . The price of EU ETS carbon credits has been lower than intended, with a large surplus of allowances, in part because of the impact of the recent economic crisis on demand. In 2012,

8316-542: The scheme. The EU's "Linking Directive" introduced the CDM and JI credits. Although this was a theoretical possibility in phase I, the over-allocation of permits combined with the inability to bank them for use in the second phase meant it was not taken up. During Phases I and II, allowances for emissions have typically been given free to firms, which has resulted in them getting windfall profits. Ellerman and Buchner (2008) suggested that during its first two years in operation,

8415-480: The second commitment period. Other developed countries without second-round targets were Canada (which withdrew from the Kyoto Protocol in 2012) and the United States (which did not ratify). If they were to remain as a part of the protocol, Canada would be hit with a $ 14 billion fine, which would be devastating to their economy, hence the reluctant decision to exit. As of October 2020, 147 states had accepted

8514-537: The section below on the Green Investment Scheme ). The "Green Investment Scheme" (GIS) is a plan for achieving environmental benefits from trading surplus allowances (AAUs) under the Kyoto Protocol. The Green Investment Scheme (GIS), a mechanism in the framework of International Emissions Trading (IET), is designed to achieve greater flexibility in reaching the targets of the Kyoto Protocol while preserving environmental integrity of IET. However, using

8613-512: The start of Phase III (January 2013) there will be a centralized allocation of permits, not National Allocation Plans, with a greater share of auctioning of permits. Unlike ETS there is no free allocation for the ETS II emission permits. Instead, all ETS II permits will be sold by the EU through auction. Allocation can act as a means of addressing concerns over loss of competitiveness , and possible "leakage" ( carbon leakage ) of emissions outside

8712-464: The start of the mandatory EU scheme. The UK's National Audit Office and DEFRA's consultants ran reviews of the system in order to establish its basis and drew lessons from it. The review concluded that the scheme did achieve some emission reductions from the participants, although more could have been achieved had targets been more demanding. European Union Emission Trading Scheme The European Union Emissions Trading System ( EU ETS )

8811-430: The system to find the most cost-effective ways of reducing emissions without significant government intervention. The scheme was said to cover energy and heat generation industries and around 11,186 plants participated in the first stage. These plants only accounted for 45% of all European emissions at the time. More than 90% of all these allowances were free of cost in both periods to build a strong base of reductions for

8910-445: The time all 27 member states minus Romania , Bulgaria , and Malta ). Consequently, observers accused national governments of abusing the system under industry pressure, and urged far stricter caps in the second phase (2008–2012). This led to a stricter regime in the second phase. The second phase (2008–12) expanded the scope of the scheme significantly. In 2007, three non-EU members, Norway , Iceland , and Liechtenstein joined

9009-473: The trading scheme. The voluntary trading scheme recruited 34 participants from UK industries and organisations who promised to make reductions in their carbon emissions, this has since expanded to 54 sectors of the UK economy. In return they received a share of a £215 million "incentive fund" from the Department for Environment, Food and Rural Affairs (DEFRA). Each agreed to hold sufficient allowances to cover its actual emissions for that year, and participate in

9108-540: The trading that occurs as part of the EU ETS, no intergovernmental emissions trading had taken place. One of the environmental problems with IET is the large surplus of allowances that are available. Russia, Ukraine, and the new EU-12 member states (the Kyoto Parties Annex I Economies-in-Transition, abbreviated "EIT": Belarus, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Russia, Slovakia, Slovenia, and Ukraine) have

9207-409: The trial phase dropped to near zero for most of the year. Meanwhile, prices for Phase II remained significantly higher throughout, reflecting the fact that allowances for the trial phase were set to expire by 31 December 2007. Verified emissions showed a net increase over the first phase of the scheme. For the countries for which data was available, emissions increased by 1.9% between 2005 and 2007 (at

9306-594: The use of the flexibility mechanisms. The CDM and JI are called "project-based mechanisms", in that they generate emission reductions from projects. The difference between IET and the project-based mechanisms is that IET is based on the setting of a quantitative restriction of emissions, while the CDM and JI are based on the idea of "production" of emission reductions. The CDM is designed to encourage production of emission reductions in non-Annex I Parties, while JI encourages production of emission reductions in Annex I Parties. The production of emission reductions generated by

9405-453: The world. It was launched in 2005 to fight global warming and is a major pillar of EU energy policy . As of 2013, the EU ETS covers more than 11,000 factories, power stations, and other installations with a net heat excess of 20 MW in 31 countries—all 27 EU member states plus Iceland , Norway , Liechtenstein and United Kingdom . In 2008, the installations regulated by the EU ETS were collectively responsible for close to half of

9504-489: Was added for the second compliance period during the Doha Round. The Protocol was based on the principle of common but differentiated responsibilities: it acknowledged that individual countries have different capabilities in combating climate change, owing to economic development , and therefore placed the obligation to reduce current emissions on developed countries on the basis that they are historically responsible for

9603-756: Was allowed, with the result that the EU would be able to meet the Phase II cap by importing units instead of reducing emissions (CCC, 2008, pp. 145, 149). According to verified EU data from 2008, the ETS resulted in an emissions reduction of 3%, or 50 million tons. At least 80 million tons of " carbon offsets " were bought for compliance with the scheme. In late 2006, the European Commission started infringement proceedings against Austria, Czech Republic, Denmark, Hungary, Italy and Spain, for failure to submit their proposed National Allocation Plans on time. Kyoto Protocol The Kyoto Protocol ( Japanese : 京都議定書 , Hepburn : Kyōto Giteisho )

9702-522: Was an international treaty which extended the 1992 United Nations Framework Convention on Climate Change (UNFCCC) that commits state parties to reduce greenhouse gas emissions , based on the scientific consensus that global warming is occurring and that human-made CO 2 emissions are driving it. The Kyoto Protocol was adopted in Kyoto , Japan, on 11 December 1997 and entered into force on 16 February 2005. There were 192 parties ( Canada withdrew from

9801-467: Was forced to go ahead with its scheme. But only flights within the EEA are covered; international flights are not. Ultimately, the Commission intended that the third trading period should cover all greenhouse gases and all sectors, including aviation, maritime transport, and forestry. For the transport sector, the large number of individual users adds complexities but might be implemented either as

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