Carbon Finance

Environmental finance
From Wikipedia, the free encyclopedia
The field of environmental finance, part of both environmental economics and the
conservation movement, exploits various financial instruments (most notably land trusts)
to protect biodiversity.
Dr. Gretchen Daily, of Stanford University has written a book, The New Economy of
Nature that addresses the issue of financing ecosystem services.
Dr. Jrg P. Blum, defined the term environmental finance (Dissertation: Corporate
Environmental Responsibility and Corporate Economic Performance..... 1994 at USIU)as
a fairly new field, "concerned mainly with finance and investment regarding the
ecological environment. The term environment, although frequently used in areas, such
as strategic management (Ansoff, 1968), has been popularized throughout literature
synonymously with the term ecological environment."
[edit] Background
Burning of fossil fuels is a major source of industrial greenhouse gas emissions,

especially for power, cement, steel, textile, fertilizer and many other industries which rely
on fossil fuels (coal, electricity derived from coal, natural gas and oil). The major
greenhouse gases emitted by these industries are carbon dioxide, methane, nitrous oxide,
hydrofluorocarbons (HFCs), etc, all of which increase the atmosphere's ability to trap
infrared energy and thus affect the climate.
The concept of carbon credits came into existence as a result of increasing awareness of
the need for controlling emissions. The IPCC (Intergovernmental Panel on Climate
Change) has observed[2] that:
Policies that provide a real or implicit price of carbon could create incentives for
producers and consumers to significantly invest in low-GHG products, technologies and
processes. Such policies could include economic instruments, government funding and
regulation,
while noting that a tradable permit system is one of the policy instruments that has been
shown to be environmentally effective in the industrial sector, as long as there are
reasonable levels of predictability over the initial allocation mechanism and long-term
price.
The mechanism was formalized in the Kyoto Protocol, an international agreement

between more than 170 countries, and the market mechanisms were agreed through the
subsequent Marrakesh Accords. The mechanism adopted was similar to the successful US
Acid Rain Program to reduce some industrial pollutants.
[edit] Emission allowances
The Protocol agreed 'caps' or quotas on the maximum amount of Greenhouse gases for
developed and developing countries, listed in its Annex I [3]. In turn these countries set
quotas on the emissions of installations run by local business and other organizations,
generically termed 'operators'. Countries manage this through their own national
'registries', which are required to be validated and monitored for compliance by the
UNFCCC[4]. Each operator has an allowance of credits, where each unit gives the owner
the right to emit one metric tonne of carbon dioxide or other equivalent greenhouse gas.
Operators that have not used up their quotas can sell their unused allowances as carbon
credits, while businesses that are about to exceed their quotas can buy the extra
allowances as credits, privately or on the open market. As demand for energy grows over
time, the total emissions must still stay within the cap, but it allows industry some
flexibility and predictability in its planning to accommodate this.
By permitting allowances to be bought and sold, an operator can seek out the most cost-
effective way of reducing its emissions, either by investing in 'cleaner' machinery and
practices or by purchasing emissions from another operator who already has excess
'capacity'.
Since 2005, the Kyoto mechanism has been adopted for CO2 trading by all the countries
within the European Union under its European Trading Scheme (EU ETS) with the
European Commission as its validating authority[5]. From 2008, EU participants must link
with the other developed countries who ratified Annex I of the protocol, and trade the six
most significant anthropogenic greenhouse gases. In the United States, which has not
ratified Kyoto, and Australia, whose ratification came into force in March 2008, similar
schemes are being considered.
[edit] Kyoto's 'Flexible mechanisms'
A credit can be an emissions allowance which was originally allocated or auctioned by

the national administrators of a cap-and-trade program, or it can be an offset of
emissions. Such offsetting and mitigating activities can occur in any developing country
which has ratified the Kyoto Protocol, and has a national agreement in place to validate
its carbon project through one of the UNFCCC's approved mechanisms. Once approved,
these units are termed Certified Emission Reductions, or CERs. The Protocol allows
these projects to be constructed and credited in advance of the Kyoto trading period.
The Kyoto Protocol provides for three mechanisms that enable countries or operators in
developed countries to acquire greenhouse gas reduction credits[6]
Under Joint Implementation (JI) a developed country with relatively high costs of
domestic greenhouse reduction would set up a project in another developed
country.
Under the Clean Development Mechanism (CDM) a developed country can
'sponsor' a greenhouse gas reduction project in a developing country where the
cost of greenhouse gas reduction project activities is usually much lower, but the
atmospheric effect is globally equivalent. The developed country would be given
credits for meeting its emission reduction targets, while the developing country
would receive the capital investment and clean technology or beneficial change in
land use.
Under International Emissions Trading (IET) countries can trade in the
international carbon credit market to cover their shortfall in allowances. Countries
with surplus credits can sell them to countries with capped emission commitments
under the Kyoto Protocol.
These carbon projects can be created by a national government or by an operator within

the country. In reality, most of the transactions are not performed by national
governments directly, but by operators who have been set quotas by their country.
[edit] Emission markets
For trading purposes, one allowance or CER is considered equivalent to one metric tonne
of CO2 emissions. These allowances can be sold privately or in the international market at
the prevailing market price. These trade and settle internationally and hence allow
allowances to be transferred between countries. Each international transfer is validated by
the UNFCCC. Each transfer of ownership within the European Union is additionally
validated by the European Commission.
Climate exchanges have been established to provide a spot market in allowances, as well
as futures and options market to help discover a market price and maintain liquidity.
Carbon prices are normally quoted in Euros per tonne of carbon dioxide or its equivalent
(CO2e). Other greenhouse gasses can also be traded, but are quoted as standard multiples
of carbon dioxide with respect to their global warming potential. These features reduce
the quota's financial impact on business, while ensuring that the quotas are met at a
national and international level.
Currently there are five exchanges trading in carbon allowances: the Chicago Climate
Exchange, European Climate Exchange, Nord Pool, PowerNext and the European Energy
Exchange. Recently, NordPool listed a contract to trade offsets generated by a CDM
carbon project called Certified Emission Reductions (CERs). Many companies now
engage in emissions abatement, offsetting, and sequestration programs to generate credits
that can be sold on one of the exchanges. At least two private electronic markets have
been established in 2008: CantorCO2e[7] and Preserval Marketplace[8].
Managing emissions is one of the fastest-growing segments in financial services in the

City of London with a market now worth about 30 billion, but which could grow to 1
trillion within a decade.[citation needed] Louis Redshaw, head of environmental markets at
Barclays Capital predicts that "Carbon will be the world's biggest commodity market, and
it could become the world's biggest market overall." [9]
[edit] Setting a market price for carbon

This section includes a list of references, related reading or external links, but its
sources remain unclear because it lacks inline citations. Please improve this
article by introducing more precise citations where appropriate. (August 2008)
Unchecked, energy use and hence emission levels are predicted to keep rising over time.
Thus the number of companies needing to buy credits will increase, and the rules of
supply and demand will push up the market price, encouraging more groups to undertake
environmentally friendly activities that create carbon credits to sell.
An individual allowance, such as a Kyoto Assigned Amount Unit (AAU) or its near-
equivalent European Union Allowance (EUA), may have a different market value to an
offset such as a CER. This is due to the lack of a developed secondary market for CERs,
a lack of homogeneity between projects which causes difficulty in pricing, as well as
questions due to the principle of supplementarity and its lifetime. Additionally, offsets
generated by a carbon project under the Clean Development Mechanism are potentially
limited in value because operators in the EU ETS are restricted as to what percentage of
their allowance can be met through these flexible mechanisms.
Yale University economics professor William Nordhaus argues that the price of carbon
needs to be high enough to motivate the changes in behavior and changes in economic
production systems necessary to effectively limit emissions of greenhouse gases.
Raising the price of carbon will achieve four goals. First, it will provide signals to
consumers about what goods and services are high-carbon ones and should therefore be
used more sparingly. Second, it will provide signals to producers about which inputs use
more carbon (such as coal and oil) and which use less or none (such as natural gas or
nuclear power), thereby inducing firms to substitute low-carbon inputs. Third, it will give
market incentives for inventors and innovators to develop and introduce low-carbon
products and processes that can replace the current generation of technologies. Fourth,
and most important, a high carbon price will economize on the information that is
required to do all three of these tasks. Through the market mechanism, a high carbon
price will raise the price of products according to their carbon content. Ethical consumers
today, hoping to minimize their carbon footprint, have little chance of making an
accurate calculation of the relative carbon use in, say, driving 250 miles as compared with
flying 250 miles. A harmonized carbon tax would raise the price of a good
proportionately to exactly the amount of CO2 that is emitted in all the stages of
production that are involved in producing that good. If 0.01 of a ton of carbon emissions
results from the wheat growing and the milling and the trucking and the baking of a loaf
of bread, then a tax of $30 per ton carbon will raise the price of bread by $0.30. The
carbon footprint is automatically calculated by the price system. Consumers would still
not know how much of the price is due to carbon emissions, but they could make their
decisions confident that they are paying for the social cost of their carbon footprint.
Nordhaus has suggested, based on the social cost of carbon emissions, that an optimal
price of carbon is around $30(US) per ton and will need to increase with inflation.
The social cost of carbon is the additional damage caused by an additional ton of carbon
emissions. ... The optimal carbon price, or optimal carbon tax, is the market price (or
carbon tax) on carbon emissions that balances the incremental costs of reducing carbon
emissions with the incremental benefits of reducing climate damages. ... [I]f a country
wished to impose a carbon tax of $30 per ton of carbon, this would involve a tax on
gasoline of about 9 cents per gallon. Similarly, the tax on coal-generated electricity would
be about 1 cent per kWh, or 10 percent of the current retail price. At current levels of
carbon emissions in the United States, a tax of $30 per ton of carbon would generate $50
billion of revenue per year.
William Nordhaus, 2008. A Question of Balance - Weighing the Options on Global

Warming Policies, Yale University Press.
[edit] How buying carbon credits can reduce emissions

See also: Economics of global warming
Carbon credits create a market for reducing greenhouse emissions by giving a monetary
value to the cost of polluting the air. Emissions become an internal cost of doing business
and are visible on the balance sheet alongside raw materials and other liabilities or assets.
By way of example, consider a business that owns a factory putting out 100,000 tonnes of
greenhouse gas emissions in a year. Its government is an Annex I country that enacts a
law to limit the emissions that the business can produce. So the factory is given a quota of
say 80,000 tonnes per year. The factory either reduces its emissions to 80,000 tonnes or is
required to purchase carbon credits to offset the excess. After costing up alternatives the
business may decide that it is uneconomical or infeasible to invest in new machinery for
that year. Instead it may choose to buy carbon credits on the open market from
organizations that have been approved as being able to sell legitimate carbon credits.
We should consider the impact of manufacturing alternative energy sources. For example,
the energy consumed and the Carbon emitted in the manufacture and transportation of a
large wind turbine would prohibit a credit being issued for a predetermined period of
time.
One seller might be a company that will offer to offset emissions through a
project in the developing world, such as recovering methane from a swine farm to
feed a power station that previously would use fossil fuel. So although the factory
continues to emit gases, it would pay another group to reduce the equivalent of
20,000 tonnes of carbon dioxide emissions from the atmosphere for that year.
Another seller may have already invested in new low-emission machinery and
have a surplus of allowances as a result. The factory could make up for its
emissions by buying 20,000 tonnes of allowances from them. The cost of the
seller's new machinery would be subsidized by the sale of allowances. Both the
buyer and the seller would submit accounts for their emissions to prove that their
allowances were met correctly.
[edit] Credits versus taxes
Carbon credits and carbon taxes each have their advantages. Credits were chosen by the
signatories to the Kyoto Protocol as an alternative to Carbon taxes. A criticism of tax-
raising schemes is that they are frequently not hypothecated, and so some or all of the
taxation raised by a government may be applied inefficiently or not used to benefit the
environment.
By treating emissions as a market commodity it becomes easier for business to

understand and manage their activities, while economists and traders can attempt to
predict future pricing using well understood market theories. Thus the main advantages of
a tradable carbon credit over a carbon tax are:
the price is more likely to be perceived as fair by those paying it.[citation needed]
Investors in credits have more control over their own costs.[citation needed]
the flexible mechanisms of the Kyoto Protocol ensure that all investment goes
into genuine sustainable carbon reduction schemes, through its internationally-
agreed validation process.
if correctly implemented a target level of emission reductions is achieved with
certainty, while under a tax the actual emissions would vary over time.
it provides a framework for rewarding people or companies who plant trees or
otherwise sequester carbon.
The advantages of a carbon tax are:
possibly less complex, expensive, and time-consuming to implementat. This

advantage is especially great when applied to markets like gasoline or home
heating oil.
perhaps some reduced risk of certain types of cheating, though under both credits
and taxes, emissions must be verified.
reduced incentives for companies to delay efficiency improvements prior to the
establisment of the baseline if credits are distributed in proportion to past
emissions.
when credits are grandfathered, this puts new or growing companies at a
disadvantage relative to more established companies.
It is clear what effect the policy has on the price of energy.[10]
[edit] Creating Real Carbon Credits
The principle of Supplementarity within the Kyoto Protocol means that internal
abatement of emissions should take precedence before a country buys in carbon credits.
However it also established the Clean Development Mechanism as a Flexible Mechanism
by which capped entities could develop real, measurable, permanent emissions reductions
voluntarily in sectors outside the cap. Many criticisms of carbon credits stem from the
fact that establishing that an emission of CO2-equivalent greenhouse gas has truly been
reduced involves a complex process. This process has evolved as the concept of a carbon
project has been refined over the past 10 years.
The first step in determining whether or not a carbon project has legitimately led to the
reduction of real, measurable, permanent emissions is understanding the CDM
methodology process. This is the process by which project sponsors submit, through a
Designated Operational Entity (DOE), their concepts for emissions reduction creation.
The CDM Executive Board, with the CDM Methodology Panel and their expert advisors,
review each project and decide how and if they do indeed result in reductions that are
additional[11]
[edit] Additionality and Its Importance
It is also important for any carbon credit (offset) to prove a concept called additionality.
Additionality is a term used by Kyoto's Clean Development Mechanism to describe the
fact that a carbon dioxide reduction project (carbon project) would not have occurred had
it not been for concern for the mitigation of climate change. More succinctly, a project
that has proven additionality is a beyond-business-as-usual project.
It is generally agreed that voluntary carbon offset projects must also prove additionality
in order to ensure the legitimacy of the environmental stewardship claims resulting from
the retirement of the carbon credit (offset). According the World Resources
Institute/World Business Council for Sustainable Development (WRI/WBCSD) : "GHG
emission trading programs operate by capping the emissions of a fixed number of
individual facilities or sources. Under these programs, tradable 'offset credits' are issued
for project-based GHG reductions that occur at sources not covered by the program. Each
offset credit allows facilities whose emissions are capped to emit more, in direct
proportion to the GHG reductions represented by the credit. The idea is to achieve a zero
net increase in GHG emissions, because each tonne of increased emissions is 'offset' by
project-based GHG reductions. The difficulty is that many projects that reduce GHG
emissions (relative to historical levels) would happen regardless of the existence of a
GHG program and without any concern for climate change mitigation. If a project 'would
have happened anyway,' then issuing offset credits for its GHG reductions will actually
allow a positive net increase in GHG emissions, undermining the emissions target of the
GHG program. Additionality is thus critical to the success and integrity of GHG
programs that recognize project-based GHG reductions."
[edit] Criticisms
Environmental restrictions and activities have been imposed on businesses through
regulation. Many are uneasy with this approach to managing emissions.
The Kyoto mechanism is the only internationally-agreed mechanism for regulating

carbon credit activities, and, crucially, includes checks for additionality and overall
effectiveness. Its supporting organisation, the UNFCCC, is the only organisation with a
global mandate on the overall effectiveness of emission control systems, although
enforcement of decisions relies on national co-operation. The Kyoto trading period only
applies for five years between 2008 and 2012. The first phase of the EU ETS system
started before then, and is expected to continue in a third phase afterwards, and may co-
ordinate with whatever is internationally-agreed at but there is general uncertainty as to
what will be agreed in Post-Kyoto Protocol negotiations on greenhouse gas emissions. As
business investment often operates over decades, this adds risk and uncertainty to their
plans. As several countries responsible for a large proportion of global emissions (notably
USA, Australia, China) have avoided mandatory caps, this also means that businesses in
capped countries may perceive themselves to be working at a competitive disadvantage
against those in uncapped countries as they are now paying for their carbon costs directly.
A key concept behind the cap and trade system is that national quotas should be chosen to
represent genuine and meaningful reductions in national output of emissions. Not only
does this ensure that overall emissions are reduced but also that the costs of emissions
trading are carried fairly across all parties to the trading system. However, governments
of capped countries may seek to unilaterally weaken their commitments, as evidenced by
the 2006 and 2007 National Allocation Plans for several countries in the EU ETS, which
were submitted late and then were initially rejected by the European Commission for
being too lax [12].
A question has been raised over the grandfathering of allowances. Countries within the
EU ETS have granted their incumbent businesses most or all of their allowances for free.
This can sometimes be perceived as a protectionist obstacle to new entrants into their
markets. There have also been accusations of power generators getting a 'windfall' profit
by passing on these emissions 'charges' to their customers[13]. As the EU ETS moves into
its second phase and joins up with Kyoto, it seems likely that these problems will be
reduced as more allowances will be auctioned.
Establishing a meaningful offset project is complex: voluntary offsetting activities

outside the CDM mechanism are effectively unregulated and there have been criticisms
of offsetting in these unregulated activities. This particularly applies to some voluntary
corporate schemes in uncapped countries and for some personal carbon offsetting
schemes.
There have also been concerns raised over the validation of CDM credits. One concern
has related to the accurate assessment of additionality. Others relate to the effort and time
taken to get a project approved. Questions may also be raised about the validation of the
effectiveness of some projects; it appears that many projects do not achieve the expected
benefit after they have been audited, and the CDM board can only approve a lower
amount of CER credits. For example, it may take longer to roll out a project than
originally planned, or an afforestation project may be reduced by disease or fire. For
these reasons some countries place additional restrictions on their local implementations
and will not allow credits for some types of carbon sink activity, such as forestry or land
use projects.
Carbon finance
(Redirected from Carbon Finance)

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Carbon finance is a new branch of Environmental finance. Carbon finance explores the
financial implications of living in a carbon-constrained world, a world in which
emissions of carbon dioxide and other greenhouse gases (GHGs) carry a price. Financial
risks and opportunities impact corporate balance sheets, and market-based instruments
are capable of transferring environmental risk and achieving environmental objectives.
Issues regarding climate change and GHG emissions must be addressed as part of
strategic management decision-making.
The general term is applied to investments in GHG emission reduction projects and the
creation (origination) of financial instruments that are tradeable on the carbon market.
Contents
[hide]
1 Joint Implementation and Clean Development Mechanism

2 Market value
3 World Bank
4 See also
5 References
6 External links
[edit] Joint Implementation and Clean Development

Mechanism
Clean Development Mechanism (CDM), is recognised through the Kyoto Protocol,

allowing the offset of emissions in developed countries by the investment in emission
reduction projects in developing countries like China, India or Latin America.
Joint Implementation (JI), is another mechanism, allowing investments in developed
countries to generate emission credit for the same or another developed country..
[edit] Market value
The market for the purchase of carbon has grown exponentially since its conception in
1996.
The following is the estimated size of the worldwide carbon market according to the
World Bank[1][2]:
Volume (millions metric tonnes, MtCO2)
2005: 718 (330 in Main Allowances Markets & 388 in Project based transactions)
2006: 1,745 (1,134 in Main Allowances Markets & 611 in Project based
transactions)
2007: 2,983 (2,109 in Main Allowances Markets & 874 in Project based
transactions)
Dollars (millions of USD)
2005: 10,908 (7,971 in Main Allowances Markets & 2,937 in Project based
transactions)
transactions)
transactions)
[edit] World Bank
The World Bank has created the World Bank Carbon Finance Unit (CFU). The World
Bank CFU uses money contributed by governments and companies in OECD countries to
purchase project-based greenhouse gas emission reductions in developing countries and
countries with economies in transition. The emission reductions are purchased through
one of the CFU's carbon funds on behalf of the contributor, and within the framework of
the Kyoto Protocol's Clean Development Mechanism (CDM) or Joint Implementation
(JI) [3].
A carbon project refers to a business initiative that receives funding because of the cut
the emission of greenhouse gases (GHGs) that will result. To prove that the project will
result in real, permanent, verifiable reductions in Greenhouse Gases, proof must be
provided in the form of a project design document and activity reports validated by an
approved third party in the case of Clean Development Mechanism (CDM) or Joint
Implementation (JI) projects.
Contents
[hide]
1 Reasons for carbon project development

2 Kyoto Protocol
3 United States
4 Operation
5 Project selection
6 References
7 External links
o 7.1 In the news
[edit] Reasons for carbon project development
Carbon projects are developed for reasons of voluntary environmental stewardship, as

well as legal compliance under a Greenhouse Gas Cap & Trade program. Voluntary
carbon (GHG) reducers may wish to monetize reductions in their carbon footprint by
trading the reductions in exchange for monetary compensation. The transfer of
environmental stewardship rights would then allow another entity to make an
environmental stewardship claim. There are several developing voluntary reduction
standards that projects can use as guides for development. Mittigation of carbon
emmision is require for take the several attemet for the cotrollinng of green house gases
&global warming so we have some suggesion for the development of such porject solar
energy, wind, hydro,biomass, biogas etc is reqired for the coserve the resource .
[edit] Kyoto Protocol
Carbon projects have become increasingly important since the advent of emissions
trading under Phase I of the Kyoto Protocol in 2005. They may be used if the project has
been validated by a Clean Development Mechanism (CDM) Designated Operational
Entity (DOE) according the United Nations Framework Convention on Climate Change.
The resulting emissions reductions may become Certified Emissions Reductions (CERs)
when a DOE has produced a verification report which has been submitted to the CDM
Executive Board.
There may be new project methodology validated by the CDM EB for post phase II
Kyoto trading.
[edit] United States
In the United States standards similar to those of the Kyoto Protocol schemes are
developing around California's AB-32 and the Regional Greenhouse Gas Initiative
(RGGI). Offset projects can be of many types, but only those that have proven
additionality are likely to become monetized under a future U.S. Cap & Trade program.
One example of such a project, the Valley Wood Carbon Sequestration Project, receives
funding from a partnership that was developed by Verus Carbon Neutral that links 17
merchants of Atlanta's Virginia-Highland shopping and dining neighborhood retail
district, through the Chicago Climate Exchange, to directly fund the thousands of acres of
forest in rural Georgia. The unique partnership established Virginia-Highland as the first
Carbon-Neutral Zone in the United States.[1] [2]
[edit] Operation
An entity whose greenhouse gas emissions are capped by a regulatory program has three
choices for complying if they exceed their cap. First, they could pay an alternative
compliance measure or "carbon tax", a default payment set by the regulatory body. This
choice is usually the least attractive given the ability to comply by trading.[citation needed]
The second option is to purchase carbon credits within an emissions trading scheme. The
trade provides an economic disincentive to the polluter, while providing an incentive to
the less polluting organisation. As fossil fuel generation becomes less attractive it will be
increasingly unattractive to exceed a carbon cap because the financial disincentive will
grow via market forces. The price of a carbon allowance would go up because supply
would decline while demand stays constant (assuming a positive growth rate for energy
consumption).
The final option is to invest in a carbon project. The carbon project will result in a
greenhouse gas emission reduction which can be used to offset the excess emissions
generated by the polluter. The financial disincentive to pollute is in the form of the capital
expenditure to develop the project or the cost of purchasing the offset from the developer
of the project. In this case the financial incentive would go to the owner of the carbon
project.
[edit] Project selection
The most important part of developing a carbon project is establishing and documenting
the additionality of the project - that the carbon project would not have otherwise
occurred. It is also essential to document the measurement and the verification
methodology applied, as outlined in the project development document.
Developing a carbon project is appropriate for renewable energy projects such as wind,
solar, low impact-small hydro, biomass, and biogas. Projects have also been developed
for a wide variety of other emissions reductions such as reforestation, fuel switching,
carbon capture and storage, and energy efficiency.
Emissions trading
(Redirected from Emission trading)

Emissions trading (or emission trading) is an administrative approach used to control

pollution by providing economic incentives for achieving reductions in the emissions of
pollutants. It is sometimes called cap and trade.
A coal power plant in Germany. Due to emissions trading, coal may become less
competitive as a fuel.
A central authority (usually a government or international body) sets a limit or cap on the
amount of a pollutant that can be emitted. Companies or other groups are issued emission
permits and are required to hold an equivalent number of allowances (or credits) which
represent the right to emit a specific amount. The total amount of allowances and credits
cannot exceed the cap, limiting total emissions to that level. Companies that need to
increase their emission allowance must buy credits from those who pollute less. The
transfer of allowances is referred to as a trade. In effect, the buyer is paying a charge for
polluting, while the seller is being rewarded for having reduced emissions by more than
was needed. Thus, in theory, those who can easily reduce emissions most cheaply will do
so, achieving the pollution reduction at the lowest possible cost to society.[1]
There are active trading programs in several pollutants. For greenhouse gases the largest
is the European Union Emission Trading Scheme.[2] In the United States there is a
national market to reduce acid rain and several regional markets in nitrogen oxides.[3]
Markets for other pollutants tend to be smaller and more localized.
Contents
[hide]
1 Overview
2 History
3 Cap and trade versus baseline and credit
4 The economics of international emissions trading
o 4.1 Example
o 4.2 Applying the economic theory
o 4.3 Prices versus quantities, and the safety valve
5 Trading systems
o 5.1 Kyoto Protocol
o 5.2 Australia
5.2.1 Garnaut Draft Report
o 5.3 European Union
o 5.4 New Zealand
o 5.5 North America
5.5.1 Renewable energy certificates
6 The carbon market
o 6.1 Market trend
o 6.2 Business reaction
7 Measuring, reporting, verification (MRV) and enforcement
8 Criticism
9 See also
10 References
11 External links
o 11.1 General trading
o 11.2 Carbon trading
[edit] Overview
The overall goal of an emissions trading plan is to reduce emissions. The cap is usually
lowered over time - aiming towards a national emissions reduction target.[4] In other
systems a portion of all traded credits must be retired, causing a net reduction in
emissions each time a trade occurs. In many cap and trade systems, organizations which
do not pollute may also participate, thus environmental groups can purchase and retire
allowances or credits and hence drive up the price of the remainder according to the law
of demand.[5] Corporations can also prematurely retire allowances by donating them to a
nonprofit entity and then be eligible for a tax deduction.
Because emissions trading uses markets to determine how to deal with the problem of
pollution, it is often touted as an example of effective free market environmentalism.
While the cap is usually set by a political process, individual companies are free to
choose how or if they will reduce their emissions. In theory, firms will choose the least-
costly way to comply with the pollution regulation, creating incentives that reduce the
cost of achieving a pollution reduction goal.
[edit] History
The efficacy of what later was to be called the "cap and trade" approach to air pollution
abatement was first demonstrated in a series of micro-economic computer simulation
studies between 1967 and 1970 for the National Air Pollution Control Administration
(predecessor to the United States Environmental Protection Agency's Office of Air and
Radiation) by Ellison Burton and William Sanjour. These studies used mathematical
models of several cities and their emission sources in order to compare the cost and
effectiveness of various control strategies.[6][7][8][9][10] Each abatement strategy was
compared with the "least cost solution" produced by a computer optimization program to
identify the least costly combination of source reductions in order to achieve a given
abatement goal.[11] In each case it was found that the least cost solution was dramatically
less costly than the same amount of pollution reduction produced by any conventional
abatement strategy.[12] This led to the concept of "cap and trade" as a means of achieving
the "least cost solution" for a given level of abatement.
The development of emissions trading over the course of its history can be divided into
four phases:[13]
1. Gestation: Theoretical articulation of the instrument (by Coase[14], Crocker[15],

Dales[16], Montgomery[17] etc.) and, independent of the former, tinkering with
"flexible regulation" at the US Environmental Protection Agency.
2. Proof of Principle: First developments towards trading of emission certificates
based on the "offset-mechanism" taken up in Clean Air Act in 1977.
3. Prototype: Launching of a first "cap and trade" system as part of the US Acid
Rain Program, officially announced as a paradigm shift in environmental policy,
as prepared by "Project 88", a network-building effort to bring together
environmental and industrial interests in the US.
4. Regime formation: branching out from the US clean air policy to global climate
policy, and from there to the European Union, along with the expectation of an
emerging global carbon market and the formation of the "carbon industry".
[edit] Cap and trade versus baseline and credit
The textbook emissions trading program can be called a "cap and trade" approach in
which an aggregate cap on all sources is established and these sources are then allowed to
trade amongst themselves to determine which sources actually emit the total pollution
load. An alternative approach with important differences is a baseline and credit
program.[18] In a baseline and credit program a set of polluters that are not under an
aggregate cap can create credits by reducing their emissions below a baseline level of
emissions. These credits can be purchased by polluters that do have a regulatory limit.
Many of the criticisms of trading in general are targeted at baseline and credit programs
rather than cap type programs.
[edit] The economics of international emissions trading
It is possible for a country to reduce emissions using a Command-Control approach, such

as regulation, direct and indirect taxes. The cost of that approach differs between
countries because the Marginal Abatement Cost (MAC) the cost of eliminating an
additional unit of pollution differs by country. It might cost China $2 to eliminate a ton
of CO2, but it would probably cost Sweden or the U.S. much more. International
emissions-trading markets were created precisely to exploit differing MACs.
[edit] Example
Emissions trading through 'Gains from Trade' can be more beneficial for both the buyer
and the seller than a simple emissions capping scheme.
Consider two European countries, such as Germany and Sweden. Each can either reduce
all the required amount of emissions by itself or it can choose to buy or sell in the market.
Example MACs for two different countries
For this example let us assume that Germany can abate its CO2 at a much cheaper cost
than Sweden, e.g. MACS > MACG where the MAC curve of Sweden is steeper (higher
slope) than that of Germany, and RReq is the total amount of emissions that need to be
reduced by a country.
On the left side of the graph is the MAC curve for Germany. RReq is the amount of
required reductions for Germany, but at RReq the MACG curve has not intersected the
market allowance price of CO2 (market allowance price = P = ). Thus, given the market
price of CO2 allowances, Germany has potential to profit if it abates more emissions than
required.
On the right side is the MAC curve for Sweden. RReq is the amount of required reductions
for Sweden, but the MACS curve already intersects the market price of CO2 allowances
before RReq has been reached. Thus, given the market allowance price of CO2, Sweden has
potential to make a cost saving if it abates fewer emissions than required internally, and
instead abates them elsewhere.
In this example Sweden would abate emissions until its MACS intersects with P (at R*),
but this would only reduce a fraction of Swedens total required abatement. After that it
could buy emissions credits from Germany for the price 'P' (per unit). The internal cost of
Swedens own abatement, combined with the credits it buys in the market from Germany,
adds up to the total required reductions (RReq) for Sweden. Thus Sweden can make a
saving from buying credits in the market ( d-e-f). This represents the Gains from
Trade, the amount of additional expense that Sweden would otherwise have to spend if it
abated all of its required emissions by itself without trading.
Germany made a profit by abating more emissions than required: it met the regulations
by abating all of the emissions that was required of it (RReq). Additionally, Germany sold
its surplus to Sweden as credits, and was paid 'P' for every unit it abated, while spending
less than 'P'. Its total revenue is the area of the graph (RReq 1 2 R*), its total abatement
cost is area (RReq 3 2 R*), and so its net benefit from selling emission credits is the area (
1-2-3) i.e. Gains from Trade
The two R* (on both graphs) represent the efficient allocations that arise from trading.
Germany: sold (R* - RReq) emission credits to Sweden at a unit price 'P'.
Sweden bought emission credits from Germany at a unit price 'P'.
If the total cost for reducing a particular amount of emissions in the 'Command Control'
scenario is called 'X', then to reduce the same amount of combined pollution in Sweden
and Germany, the total abatement cost would be less in the 'Emissions Trading' scenario
i.e. (X - 123 - def).
The example above applies not just at the national level: it applies just as well between
two companies in different countries, or between two subsidiaries within the same
company.
[edit] Applying the economic theory
The nature of the pollutant plays a very important role when policy-makers decide which
framework should be used to control pollution.
CO2 acts globally, thus its impact on the environment is generally similar wherever in the
globe it is released. So the location of the originator of the emissions does not really
matter from an environmental standpoint.
The policy framework should be different for regional pollutants[19] (e.g. SO2 and NOX,
and also mercury) because the impact exerted by these pollutants may not be the same in
all locations. The same amount of a regional pollutant can exert a very high impact in
some locations and a low impact in other locations, so it does actually matter where the
pollutant is released. This is known as the 'Hot Spot' problem.
A Lagrange framework is commonly used to determine the least cost of achieving an

objective, in this case the total reduction in emissions required in a year. In some cases it
is possible to use the Lagrange optimization framework to determine the required
reductions for each country (based on their MAC) so that the total cost of reduction is
minimized. In such a scenario, the Lagrange multiplier represents the market allowance
price (P) of a pollutant, such as the current market allowance price of emissions in
Europe[20] and the USA.[21]
All countries face the market allowance price as existent in the market that day, so they
are able to make individual decisions that would maximize their profit while at the same
time achieving regulatory compliance. This is also another version of the Equi-Marginal
Principle, commonly used in economics to choose the most economically efficient
decision.
[edit] Prices versus quantities, and the safety valve
There has been longstanding debate on the relative merits of price versus quantity
instruments to achieve emission reductions.[22]
An emission cap and permit trading system is a quantity instrument because it

fixes the overall emission level (quantity) and allows the price to vary. One
problem with the cap and trade system is the uncertainty of the cost of compliance
as the price of a permit is not known in advance and will vary over time according
to market conditions.
In contrast, an emission tax is a price instrument because it fixes the price while
the emission level is allowed to vary according to economic activity. A major
drawback of an emission tax is that the environmental outcome (e.g. a limit on the
amount of emissions) is not guaranteed.
The best choice depends on the sensitivity of the costs of emission reduction, compared
to the sensitivity of the benefits (i.e., climate damages avoided by a reduction) when the
level of emission control is varied.
Because there is high uncertainty in the compliance costs of firms, some argue that the
optimum choice is the price mechanism.
However, some scientists have warned of a threshold in atmospheric concentrations of
carbon dioxide beyond which a run-away warming effect could take place, with a large
possibility of causing irreversible damages. If this is a conceivable risk then a quantity
instrument could be a better choice because the quantity of emissions may be capped with
a higher degree of certainty. However, this may not be true if this risk exists but cannot be
attached to a known level of GHG concentration or a known emission pathway.[23]
A third option, known as a safety valve, is a hybrid of the price and quantity instruments.
The system is essentially an emission cap and tradeable permit system but the maximum
(or minimum) permit price is capped. Emitters have the choice of either obtaining permits
in the marketplace or purchasing them from the government at a specified trigger price
(which could be adjusted over time). The system is sometimes recommended as a way of
overcoming the fundamental disadvantages of both systems by giving governments the
flexibility to adjust the system as new information comes to light. It can be shown that by
setting the trigger price high enough, or the number of permits low enough, the safety
valve can be used to mimic either a pure quantity or pure price mechanism.[24]
All three methods are being used as policy instruments to control greenhouse gas
emissions: the EU-ETS is a quantity system using the cap and trading system to meet
targets set by National Allocation Plans, the UK's Climate Change Levy is a price system
using a direct carbon tax, while China uses the CO2 market price for funding of its Clean
Development Mechanism projects, but imposes a safety valve of a minimum price per
tonne of CO2.
[edit] Trading systems
[edit] Kyoto Protocol
The Kyoto Protocol is a 1997 international treaty which came into force in 2005, which
binds most developed nations to a cap and trade system for the six major greenhouse
gases.[25] (The United States is the only industrialized nation under Annex I which has not
ratified and therefore is not bound by it.) Emission quotas were agreed by each
participating country, with the intention of reducing their overall emissions by 5.2% of
their 1990 levels by the end of 2012. Under the treaty, for the 5-year compliance period
from 2008 until 2012,[26] nations that emit less than their quota will be able to sell
emissions credits to nations that exceed their quota.
It is also possible for developed countries within the trading scheme to sponsor carbon
projects that provide a reduction in greenhouse gas emissions in other countries, as a way
of generating tradeable carbon credits. The Protocol allows this through Clean
Development Mechanism (CDM) and Joint Implementation (JI) projects, in order to
provide flexible mechanisms to aid regulated entities in meeting their compliance with
their caps. The UNFCCC validates all CDM projects to ensure they create genuine
additional savings and that there is no carbon leakage.
The Intergovernmental Panel on Climate Change has projected that the financial effect of
compliance through trading within the Kyoto commitment period will be 'limited' at
between 0.1-1.1% of GDP among trading countries.[27] By comparison the Stern report
placed the costs of doing nothing at five to 20 times higher.[28]
[edit] Australia
[edit] Garnaut Draft Report

Main articles: Garnaut Climate Change Review and Carbon Pollution Reduction Scheme
In 2003 the New South Wales (NSW) state government unilaterally established the NSW
Greenhouse Gas Abatement Scheme to reduce emissions by requiring electricity
generators and large consumers to purchase NSW Greenhouse Abatement Certificates
(NGACs). This has prompted the rollout of free energy-efficient compact fluorescent
lightbulbs and other energy-efficiency measures, funded by the credits. This scheme has
been criticised by the Centre for Energy and Environmental Markets (CEEM) of the
UNSW because of its reliance upon offsets. [29]
On 4 June 2007, former Prime Minister John Howard announced an Australian Carbon
Trading Scheme to be introduced by 2012, but opposition parties called the plan "too
little, too late."[30] On 24 November 2007 Howard's coalition government lost a general
election and was succeeded by the Labor Party, with Kevin Rudd taking over as prime
minister. Prime Minister Rudd announced that a cap-and-trade emissions trading scheme
would be introduced in 2010[31] , however this scheme was delayed by a year until mid-
2011.[32]
Australia's Commonwealth, State and Territory Governments commissioned the Garnaut

Climate Change Review, a study by Professor Ross Garnaut on the mechanism of a
potential emissions trading scheme. Its interim report was released on 21 February
2008.[33] It recommended an emissions trading scheme that includes transportation but not
agriculture, and that emissions permits should be sold competitively and not allocated
free to carbon polluters. It recognised that energy prices will increase and that low
income families will need to be compensated. It recommended more support for research
into low emissions technologies and a new body to oversee such research. It also
recognised the need for transition assistance for coal mining areas. [34]
In response to Garnaut's draft report, the Rudd Labor government issued a Green Paper[35]
on 16 July that described the intended design of the actual trading scheme. Draft
legislation will be released in December 2008, to become law in 2009.[36]
[edit] European Union
Main article: European Union Emission Trading Scheme

The European Union Emission Trading Scheme (or EU ETS) is the largest multi-national,
greenhouse gas emissions trading scheme in the world and was created in conjunction
with the Kyoto Protocol.
After voluntary trials in the UK and Denmark, Phase I commenced operation in January
2005 with all 15 (now 25 of the 27) member states of the European Union
participating.[37] The program caps the amount of carbon dioxide that can be emitted from
large installations, such as power plants and carbon intensive factories and covers almost
half of the EU's Carbon Dioxide emissions.[38] Phase I permits participants to trade
amongst themselves and in validated credits from the developing world through Kyoto's
Clean Development Mechanism.
Whilst the first phase (2005 - 2007) has received much criticism due to oversupply of
allowances and the distribution method of allowances (via grandfathering rather than
auctioning), Phase II links the ETS to other countries participating in the Kyoto trading
system. The European Commission has been tough on Member States' Plans for Phase II,
dismissing many of them as being too loose again.[39] In addition, the first phase has
established a strong carbon market. Compliance was high in 2006, increasing confidence
in the scheme, although the value of allowances dropped when the national caps were
met.
All EU member states have ratified the Kyoto Protocol, and so the second phase of the
EU ETS has been designed to support the Kyoto mechanisms and compliance period.
Thus any organisation trading through the ETS should also meet the international trading
obligations under Kyoto.
[edit] New Zealand
The New Zealand Government introduced a bill for emissions trading schemes before a
select committee. Various reports by a range of groups support the scheme but differ in
opinion as to how it should be implemented.[40] An interesting feature of the New Zealand
Emissions Trading Scheme is that it includes forest carbon and creates deforestation
liabilities for landowners.[41]
The emissions trading bill passed into law on 10 September 2008. On November 16 2008
the newly formed National-led government announced that it would delay
implementation of the ETS pending a full review of climate change policy.
See also: Climate change in New Zealand
[edit] North America
This article may not provide balanced geographical coverage on

section. Please improve this article or discuss the issue on the talk page.
Related terms:
Acid Rain Program
An early example of an emission trading system has been the SO2 trading system under
the framework of the Acid Rain Program of the 1990 Clean Air Act in the U.S. Under the
program, which is essentially a cap-and-trade emissions trading system, SO2 emissions
were reduced by 50 percent from 1980 levels by 2007.[42] Some experts argue that the
"cap and trade" system of SO2 emissions reduction has reduced the cost of controlling
acid rain by as much as 80 percent versus source-by-source reduction.[43][44]
In 1997, the State of Illinois adopted a trading program for volatile organic compounds in
most of the Chicago area, called the Emissions Reduction Market System.[45] Beginning
in 2000, over 100 major sources of pollution in eight Illinois counties began trading
pollution credits.
In 2003, New York State proposed and attained commitments from nine Northeast states
to form a cap and trade carbon dioxide emissions program for power generators, called
the Regional Greenhouse Gas Initiative (RGGI). This program launched on January 1,
2009 with the aim to reduce the carbon "budget" of each state's electricity generation
sector to 10 percent below their 2009 allowances by 2018.[46]
Also in 2003, U.S. corporations were able to trade CO2 emission allowances on the
Chicago Climate Exchange under a voluntary scheme. In August 2007, the Exchange
announced a mechanism to create emission offsets for projects within the United States
that cleanly destroy ozone-depleting substances.[47]
In 2007, the California Legislature passed the California Global Warming Solutions Act,
AB-32, which was signed into law by Governor Arnold Schwarzenegger. Thus far,
flexible mechanisms in the form of project based offsets have been suggested for five
main project types. A carbon project would create offsets by showing that it has reduced
carbon dioxide and equivalent gases. The project types include: manure management,
forestry, building energy, SF6, and landfill gas capture.
Since February 2007, seven U.S. states and four Canadian provinces have joined together
to create the Western Climate Initiative, a regional greenhouse gas emissions trading
system.[48]
On November 17, 2008 President-elect Barack Obama clarified, in a talk recorded for
YouTube, that the US will enter a cap and trade system to limit global warming.[49]
The 2010 United States federal budget proposes to support clean energy development
with a 10-year investment of US $15 billion per year, generated from the sale of
greenhouse gas (GHG) emissions credits. Under the proposed cap-and-trade program, all
GHG emissions credits would be auctioned off, generating an estimated $78.7 billion in
additional revenue in FY 2012, steadily increasing to $83 billion by FY 2019.[50]
On April 17, the EPA Administration issued a proposed endangerment finding and a
related proposed cause or contribute finding regarding greenhouse gases under section
202(a) of the Clean Air Act (section dealing with Emission standards for new motor
vehicles or new motor vehicle engines ).
[edit] Renewable energy certificates

Main article: Renewable Energy Certificates
Renewable Energy Certificates, or "green tags", are transferable rights for renewable
energy within some American states. A renewable energy provider gets issued one green
tag for each 1,000 KWh of energy it produces. The energy is sold into the electrical grid,
and the certificates can be sold on the open market for additional profit. They are
purchased by firms or individuals in order to identify a portion of their energy with
renewable sources and are voluntary.
They are typically used like an offsetting scheme or to show corporate responsibility,
although their issuance is unregulated, with no national registry to ensure there is no
double-counting. However, it is one way that an organization could purchase its energy
from a local provider who uses fossil fuels, but back it with a certificate that supports a
specific wind or hydro power project.
[edit] The carbon market

This section deals with mandatory carbon emissions trading between nations. For
voluntary carbon trading schemes for individuals, see Personal carbon trading
and Carbon offset
Main article: Carbon emission trading
Carbon emissions trading is emissions trading specifically for carbon dioxide (calculated
in tonnes of carbon dioxide equivalent or tCO2e) and currently makes up the bulk of
emissions trading. It is one of the ways countries can meet their obligations under the
Kyoto Protocol to reduce carbon emissions and thereby mitigate global warming.
[edit] Market trend
Carbon emissions trading has been steadily increasing in recent years. According to the
World Bank's Carbon Finance Unit, 374 million metric tonnes of carbon dioxide
equivalent (tCO2e) were exchanged through projects in 2005, a 240% increase relative to
2004 (110 mtCO2e)[51] which was itself a 41% increase relative to 2003 (78 mtCO2e).[52]
In terms of dollars, the World Bank has estimated that the size of the carbon market was
11 billion USD in 2005, 30 billion USD in 2006,[51] and 64 billion in 2007.[53]
The Marrakesh Accords of the Kyoto protocol defined the international trading
mechanisms and registries needed to support trading between countries, with allowance
trading now occurring between European countries and Asian countries. However, while
the USA as a nation did not ratify the Protocol, many of its states are now developing
cap-and-trade systems and are looking at ways to link their emissions trading systems
together, nationally and internationally, to seek out the lowest costs and improve liquidity
of the market.[54] However, these states also wish to preserve their individual integrity and
unique features. For example, in contrast to the other Kyoto-compliant systems, some
states propose other types of greenhouse gas sources, different measurement methods,
setting a maximum on the price of allowances, or restricting access to CDM projects.
Creating instruments that are not truly fungible would introduce instability and make
pricing difficult. Various proposals are being investigated to see how these systems might
be linked across markets, with the International Carbon Action Partnership (ICAP) as an
international body to help co-ordinate this.[55][56]
[edit] Business reaction
With the creation of a market for mandatory trading of carbon dioxide emissions within
the Kyoto Protocol, the London financial marketplace has established itself as the center
of the carbon finance market, and is expected to have grown into a market valued at $60
billion in 2007.[57] The voluntary offset market, by comparison, is projected to grow to
about $4bn by 2010.[58]
23 multinational corporations came together in the G8 Climate Change Roundtable, a

business group formed at the January 2005 World Economic Forum. The group included
Ford, Toyota, British Airways, BP and Unilever. On June 9, 2005 the Group published a
statement stating that there was a need to act on climate change and stressing the
importance of market-based solutions. It called on governments to establish "clear,
transparent, and consistent price signals" through "creation of a long-term policy
framework" that would include all major producers of greenhouse gases.[59] By December
2007 this had grown to encompass 150 global businesses.[60]
Business in the UK have come out strongly in support of emissions trading as a key tool
to mitigate climate change, supported by NGOs.[61] However, not all businesses favor a
trading approach. On December 11, 2008, Rex Tillerson, the CEO of Exxonmobil, said a
carbon tax is "a more direct, more transparent and more effective approach" than a cap
and trade program, which he said, "inevitably introduces unnecessary cost and
complexity." He also said that he hoped that the revenues from a carbon tax would be
used to lower other taxes so as to be revenue neutral. [62]
The International Air Transport Association, whose 230 member airlines comprise 93%
of all international traffic, position is that trading should be based on benchmarking,
setting emissions levels based on industry averages, rather than grandfathering, which
would use individual companies previous emissions levels to set their future permit
allowances. They argue grandfathering would penalise airlines that took early action to
modernise their fleets, while a benchmarking approach, if designed properly, would
reward more efficient operations." [63]
[edit] Measuring, reporting, verification (MRV) and enforcement
Meaningful emission reductions within a trading system can only occur if they can be
measured at the level of operator or installation and reported to a regulator. For
greenhouse gases all trading countries maintain an inventory of emissions at national and
installation level; in addition, the trading groups within North America maintain
inventories at the state level through The Climate Registry. For trading between regions
these inventories must be consistent, with equivalent units and measurement techniques.
In some industrial processes emissions can be physically measured by inserting sensors

and flowmeters in chimneys and stacks, but many types of activity rely on theoretical
calculations for measurement. Depending on local legislation, these measurements may
require additional checks and verification by government or third party auditors, prior or
post submission to the local regulator.
Another critical part is enforcement.[64] Without effective MRV and enforcement the value
of allowances are diminished. Enforcement can be done using several means, including
fines or sanctioning those that have exceeded their allowances. Concerns include the cost
of MRV and enforcement and the risk that facilities may be tempted to mislead rather
than make real reductions or make up their shortfall by purchasing allowances or offsets
from another entity. The net effect of a corrupt reporting system or poorly managed or
financed regulator may be a discount on emission costs, and a (hidden) increase in actual
emissions.
[edit] Criticism
There are critics of the methods, mainly environmental justice nongovernmental

organizations (NGOs) and movements, who see carbon trading as a proliferation of the
free market into public spaces and environmental policy-making.[65] They level
accusations of failures in accounting, dubious science and the destructive impacts of
projects upon local peoples and environments as reasons why trading pollution
allowances should be avoided.[66] In its place they advocate making reductions at the
source of pollution and energy policies that are justice-based and community-driven.[67]
Most of the criticisms have been focused on the carbon market created through
investment in Kyoto Mechanisms. Criticism of 'cap and trade' emissions trading has
generally been more limited to lack of credibility in the first phase of the EU ETS.
Critics argue that emissions trading does little to solve pollution problems overall, as
groups that do not pollute sell their conservation to the highest bidder. Overall reductions
would need to come from a sufficient and challenging reduction of allowances available
in the system.
Regulatory agencies run the risk of issuing too many emission credits, diluting the
effectiveness of regulation, and practically removing the cap. In this case, instead of any
net reduction in carbon dioxide emissions, beneficiaries of emissions trading simply do
more of the polluting activity. The National Allocation Plans by member governments of
the European Union Emission Trading Scheme were criticised for this when it became
apparent that actual emissions would be less than the government-issued carbon
allowances at the end of Phase I of the scheme.
They have also been criticised for the practice of grandfathering, where polluters are
given free allowances by governments, instead of being made to pay for them.[68] Critics
instead advocate for auctioning the credits. The proceeds could be used for research and
development of sustainable technology.[69]
Critics of carbon trading, such as Carbon Trade Watch, argue that it places
disproportionate emphasis on individual lifestyles and carbon footprints, distracting
attention from the wider, systemic changes and collective political action that needs to be
taken to tackle climate change.[65] Groups such as the Corner House have argued that the
market will choose the easiest means to save a given quantity of carbon in the short term,
which may be different to the pathway required to obtain sustained and sizable reductions
over a longer period, and so a market led approach is likely to reinforce technological
lock-in. For instance small cuts may often be achieved cheaply through investment in
making a technology more efficient, where larger cuts would require scrapping the
technology and using a different one. They also argue that emissions trading is
undermining alternative approaches to pollution control with which it does not combine
well, and so the overall effect it is having is to actually stall significant change to less
polluting technologies.
The problem of unstable prices can be resolved, to some degree, by the creation of
forward markets in caps. Nevertheless, it is easier to make a tax predictable than the price
of a cap. However, the corresponding uncertainty under a tax is the level of emissions
reductions achieved.
The Financial Times published an article on cap and trade systems which argued that
"Carbon markets create a muddle" and "...leave much room for unverifiable
manipulation".[70]
More recent criticism of emissions trading regarding implementation is that old growth
forests, which have slow carbon absorption rates, are being cleared and replaced with
fast-growing vegetation, to the detriment of the local communities.[71]
Recent proposals for alternative schemes that seek to avoid the problems of Cap and
Trade schemes include Cap and Share, which was being actively considered by the Irish
Parliament in May 2008, and the Sky Trust schemes.
Personal carbon trading refers to proposed emissions trading schemes under which
emissions credits are allocated to adult individuals on a (broadly) equal per capita basis,
within national carbon budgets. Individuals then surrender these credits when buying fuel
or electricity. Individuals wanting or needing to emit at a level above that permitted by
their initial allocation would be able to engage in emissions trading and purchase
additional credits. Conversely, those individuals who emit at a level below that permitted
by their initial allocation have the opportunity to sell their surplus credits. Thus,
individual trading under Personal Carbon Trading is similar to the trading of companies
under EU ETS.
Personal carbon trading is sometimes confused with carbon offsetting due to the similar
notion of paying for emissions allowances, but is a quite different concept designed to be
mandatory and to guarantee that nations achieve their domestic carbon emissions targets
(rather than attempting to do so via international trading or offsetting).
Contents
[hide]
1 Proposals
2 Progress towards implementation
3 Related emissions reduction proposals and initiatives
4 Media
5 See also
6 References
7 External links
o 7.1 General
o 7.2 Tradable Energy Quotas (AKA Domestic Tradable Quotas)
[edit] Proposals
Current proposals include:
Tradable Energy Quotas (TEQs) - devised by environmental writer, David

Fleming, who first published the idea in 1996 under its former name Domestic
Tradable Quotas (DTQs). The UK's Tyndall Centre for Climate Change Research
has been researching this scheme since 2003[1], and more recently the Royal
Society for the encouragement of Arts, Manufactures & Commerce (RSA)
through its project RSA CarbonLimited, part-funded by the UK government[2].
Personal Carbon Allowances (PCAs) - described in the book How we can save
the planet by Mayer Hillman and Tina Fawcett. Work on PCAs is ongoing at the
Environmental Change Institute[3], Oxford, UK. The title "PCAs" or "PCA
scheme" is sometimes used generically to refer to any proposed form of personal
carbon trading.
Tradable Personal Pollution Allowances - originally proposed in an article by

Dr. Kirk Barrett in 1995[4] and applicable to any form of pollution, including
carbon dioxide.
Individuals would most likely hold their emissions credits in electronic accounts, and
would surrender them when they make carbon-related purchases, such as electricity,
heating fuel and petroleum. PCAs could also require individuals to use credits for public
transport. Tradable Energy Quotas would bring all other sectors of society (eg. Industry,
Government) within the scope of a single scheme.
Individuals who exceed their allocation (i.e. those who want to use more emissions
credits than they have been given) would be able to purchase additional credits from
those who use less, so individuals that are under allocation would profit from their small
carbon footprint.
Proponents of personal carbon trading claim that it is an equitable way of addressing

climate change and peak oil, as it could guarantee that a national economy lives within its
agreed carbon budget and ensure fair access to fuel and energy. They also believe it
would increase carbon literacy among the public, while encouraging more localised
economies.[5]
Personal carbon trading has been criticised for its possible complexity and high
implementation costs. As yet, there is minimal reliable data on these issues. There is also
the fear that personal "rationing" and trading of allowances will be politically
unacceptable, especially if those allowances are used to buy from industries who are
already passing-on costs from their participation in carbon levy or trading schemes such
as the EU ETS.
Research in this area[6][7] has shown that personal carbon trading would be a progressive
policy instrument - redistributing money from the rich to the poor - as the rich use more
energy than the poor, and so would need to buy allowances from them. This is in contrast
to a direct carbon tax, under which all lower income people are worse off, prior to
revenue redistribution.
[edit] Progress towards implementation
There are no operating schemes currently in existence, although the United Kingdom
Climate Change Bill will grant powers allowing the Government to introduce a personal
carbon trading scheme without further primary legislation.
In May 2008 DEFRA completed a pre-feasibility study into TEQs, with the headline
finding that personal carbon trading has potential to engage individuals in taking action
to combat climate change, but is essentially ahead of its time and expected costs for
implementation are high. Based on this DEFRA announced that the Government
remains interested in the concept of personal carbon trading and, although it will not be
continuing its research programme at this stage, it will monitor the wealth of research
focusing on this area and may introduce personal carbon trading if the value of carbon
savings and cost implications change".[8]
Later that same month the UK Parliament Environmental Audit Committee produced
their report on the subject, which concluded that personal carbon trading could be
essential in helping to reduce our national carbon footprint" and rebuked the Government
for delaying a full feasibility study, stating that "although we commend the Government
for its intention to maintain engagement in academic work on the topic, we urge it to
undertake a stronger role, leading and shaping debate and coordinating research".[9]
[edit] Related emissions reduction proposals and initiatives
Carbon Rationing Action Groups[10] - groups in the UK and US that voluntarily

cap their greenhouse gas emissions
"Icecaps" - devised by George Monbiot in his book Heat: How to Stop the Planet
Burning.
[edit] Media
Carbon rationing is considered in the new feature film The Age of Stupid, set for release
in February 2009.
Sustainability measurement
(Redirected from Environmental accounting)

Sustainability measurement is a term that denotes the measurements used as the

quantitative basis for the informed management of sustainability.[1] The metrics used for
the measurement of sustainability (involving the sustainability of environmental, social
and economic domains, both individually and in various combinations) include
indicators, benchmarks, audits, indexes, accounting and reporting systems and more, and
they can apply on all scales from global to local. [2]
From an environmental perspective sustainability measurement can be regarded as a

quantitative aspect of resource management that compares the demand on ecosystem
services with the available supply.[3]
Contents
[hide]
1 Sustainability indicators and their function

2 Metrics at the global scale
o 2.1 United Nations Indicators
o 2.2 Benchmarks, indicators, indexes, auditing etc.
o 2.3 Resource metrics
2.3.1 Economics, oil and energy
o 2.4 Energy return on energy investment
2.4.1 Growth-based economic models
3 Hubbert peaks
o 3.1 Natural gas
o 3.2 Coal
o 3.3 Fissionable materials
o 3.4 Metals
o 3.5 Phosphorus
o 3.6 Peak water
o 3.7 Renewable resources
4 See also
5 References
[edit] Sustainability indicators and their function
The principal objective of sustainability indicators is to inform public policy-making as

part of the process of sustainability governance. [4] Sustainability indicators can provide
information on any aspect of the interplay between the environment and socio-economic
activities. [5] Building strategic indicator sets generally deals with just a few simple
questions: what is happening? (descriptive indicators), does it matter and are we reaching
targets? (performance indicators), are we improving? (efficiency indicators), are
measures working? (policy effectiveness indicators), and are we generally better off?
(total welfare indicators). One popular general framework used by The European
Environment Agency uses a slight modification of the Organisation for Economic
Cooperation and Development DPSIR system.[6] This breaks up environmental impact
into five stages. Social and economic developments (consumption and production)
(D)rive or initiate environmental (P)ressures which, in turn, produces a change in the
(S)tate of the environment which leads to (I)mpacts of various kinds. Societal
(R)esponses (policy guided by sustainability indicators) can be introduced at any stage of
this sequence of events.
[edit] Metrics at the global scale
[edit] United Nations Indicators

The United Nations has developed extensive sustainability measurement tools in relation
to sustainable development [7] as well as a System of Integrated Environmental and
Economic Accounting. [8]
[edit] Benchmarks, indicators, indexes, auditing etc.
In the last couple of decades there has arisen a crowded toolbox of quantitative methods
used to assess sustainability including measures of resource use like life cycle
assessment, measures of consumption like the ecological footprint and measurements of
quality of environmental governance like the Environmental Performance Index. The
following is a list of quantitative "tools" used by sustainability scientists - the different
categories are for convenience only as defining criteria will intergrade. It would be too
difficult to list all those methods available at different levels of organisation so those
listed here are at for the global level only.
This list is incomplete; you can help by expanding it.
benchmarks
A benchmark is a point of reference for a measurement. Once a benchmark is

established it is possible to assess trends and measure progress. Baseline global
data on a range of sustainability parameters is available at list of global
sustainability statistics
2010 Biodiversity Indicators Partnership
indexes
A sustainability index is an aggregate sustainability indicator that combines

multiple sources of data. There is a Consultative Group on Sustainable
Development Indices[9]
Air Quality Index GDP per capita Happy Planet Index
Child Development Gini coefficient Human Development
Index Gender Parity Index Index (see List of
Corruption Gender-related countries by HDI)
Perceptions Index Development Index Legatum Prosperity
Democracy Index Gender Index
Environmental Empowerment Index of Sustainable
Performance Index Measure Economic Welfare
Emergy Sustainability Gross national Life Expectancy
Index happiness Index
Education Index Genuine Progress Water Poverty Index
[10]
Environmental Indicator
Sustainability Index (formerly Index of
Environmental Sustainable Economic
Vulnerability Index Welfare)
Gross National
Product
metrics
Many environmental problems ultimately relate to the human effect on those global
biogeochemical cycles that are critical to life. Over the last decade monitoring these
cycles has become a more urgent target for research:
water cycle nitrogen cycle

carbon cycle sulphur cycle
phosphorus cycle oxygen cycle

auditing
Sustainability auditing and reporting are used to evaluate the sustainability

performance of a company, organization, or other entity using various
performance indicators. [11] Popular auditing procedures available at the global
level include:
ISO 14000
ISO 14031
Natural Step
Triple Bottom Line Accounting
input-output analysis can be used for any level of organization with a
financial budget. It relates environmental impact to expenditure by
calculating the resource intensity of goods and services.
development and NGO project auditing
"Litmus test" type indicators are also used in the development and NGO
community to test conformity and compliance with the guidelines of sustainable
human development and the international Rio Declaration of 1992.
Sustainable development indicator for NGOs and Other Organizations[12]
reporting
o Global Reporting Initiative Global Reporting Initiative modelling and
monitoring procedures.[13][14][15] Many of these have only just been
developed.
o State of the Environment reporting provides general background
information on the environment and is progressively including more
indicators.
o European sustainability [16]
accounting
Some accounting methods attempt to include environmental costs rather treating
them as externalities
Green accounting
Sustainable Value
Sustainability economics [17]
[edit] Resource metrics
Part of this process can relate to resource use such as energy accounting or to economic
metrics or price system values as compared to non-market economics potential, for
understanding resource use.[18] An important task for resource theory (energy economics)
is to develop methods to optimize resource conversion processes.[19] These systems are
described and analyzed by means of the methods of mathematics and the natural
sciences.[20] Human factors, however, have dominated the development of our perspective
of the relationship between nature and society since at least the Industrial Revolution, and
in particular have influenced how we describe and measure the economic impacts of
changes in resource quality. A balanced view of these issues requires an understanding of
the physical framework in which all human ideas, institutions, and aspirations must
operate. [21]
[edit] Economics, oil and energy
Oil imports by country
[edit] Energy return on energy investment
When oil production first began in the mid-nineteenth century, the largest oil fields
recovered fifty barrels of oil for every barrel used in the extraction, transportation and
refining. This ratio is often referred to as the Energy Return on Energy Investment (EROI
or EROEI). Currently, between one and five barrels of oil are recovered for each barrel-
equivalent of energy used in the recovery process. As the EROEI drops to one, or
equivalently the Net energy gain falls to zero, the oil production is no longer a net energy
source. This happens long before the resource is physically exhausted.
Note that it is important to understand the distinction between a barrel of oil, which is a
measure of oil, and a barrel of oil equivalent (BOE), which is a measure of energy. Many
sources of energy, such as fission, solar, wind, and coal, are not subject to the same near-
term supply restrictions that oil is. Accordingly, even an oil source with an EROEI of 0.5
can be usefully exploited if the energy required to produce that oil comes from a cheap
and plentiful energy source. Availability of cheap, but hard to transport, natural gas in
some oil fields has led to using natural gas to fuel enhanced oil recovery. Similarly,
natural gas in huge amounts is used to power most Athabasca Tar Sands plants. Cheap
natural gas has also led to Ethanol fuel produced with a net EROEI of less than 1,
although figures in this area are controversial because methods to measure EROEI are in
debate.
[edit] Growth-based economic models
Insofar as economic growth is driven by oil consumption growth, post-peak societies

must adapt. M. King Hubbert believed [8]:
Our principal constraints are cultural. During the last two centuries we have
known nothing but exponential growth and in parallel we have evolved what
amounts to an exponential-growth culture, a culture so heavily dependent upon
the continuance of exponential growth for its stability that it is incapable of
reckoning with problems of nongrowth.
Some economists describe the problem as uneconomic growth or a false economy. At the
political right, Fred Ikle has warned about "conservatives addicted to the Utopia of
Perpetual Growth" [9]. Brief oil interruptions in 1973 and 1979 markedly slowed - but
did not stop - the growth of world GDP [10].
Between 1950 and 1984, as the Green Revolution transformed agriculture around the
globe, world grain production increased by 250%. The energy for the Green Revolution
was provided by fossil fuels in the form of fertilizers (natural gas), pesticides (oil), and
hydrocarbon fueled irrigation.[22]
David Pimentel, professor of ecology and agriculture at Cornell University, and Mario
Giampietro, senior researcher at the National Research Institute on Food and Nutrition
(INRAN), place in their study Food, Land, Population and the U.S. Economy the
maximum U.S. population for a sustainable economy at 200 million. To achieve a
sustainable economy world population will have to be reduced by two-thirds, says the
study.[23] Without population reduction, this study predicts an agricultural crisis beginning
in 2020, becoming critical c. 2050. The peaking of global oil along with the decline in
regional natural gas production may precipitate this agricultural crisis sooner than
generally expected. Dale Allen Pfeiffer claims that coming decades could see spiraling
food prices without relief and massive starvation on a global level such as never
experienced before.[24][25]
[edit] Hubbert peaks
Although Hubbert peak theory receives most attention in relation to peak oil production,
it has also been applied to other natural resources.
[edit] Natural gas
Main article: Peak gas
Doug Reynolds predicted in 2005 that the North American peak would occur in 2007.[26]
Bentley (p.189) predicted a world "decline in conventional gas production from about
2020".[27]
[edit] Coal
Main article: Peak coal
Peak coal is significantly further out than peak oil, but we can observe the example of
anthracite in the USA, a high grade coal whose production peaked in the 1920s.
Anthracite was studied by Hubbert, and matches a curve closely.[28] Pennsylvania's coal
production also matches Hubbert's curve closely, but this does not mean that coal in
Pennsylvania is exhausted--far from it. If production in Pennsylvania returned at its all
time high, there are reserves for 190 years. Hubbert had recoverable coal reserves
worldwide at 2500 109 metric tons and peaking around 2150(depending on usage).
More recent estimates suggest an earlier peak. Coal: Resources and Future Production
(PDF 630KB[11]), published on April 5 2007 by the Energy Watch Group (EWG), which
reports to the German Parliament, found that global coal production could peak in as few
as 15 years [12]. Reporting on this Richard Heinberg also notes that the date of peak
annual energetic extraction from coal will likely come earlier than the date of peak in
quantity of coal (tons per year) extracted as the most energy-dense types of coal have
been mined most extensively [13]. A second study, The Future of Coal by B. Kavalov and
S. D. Peteves of the Institute for Energy (IFE), prepared for European Commission Joint
Research Centre, reaches similar conclusions and states that ""coal might not be so
abundant, widely available and reliable as an energy source in the future".[14].
Work by David Rutledge of Caltech predicts that the total of world coal production will
amount to only about 450 gigatonnes.[29] This implies that coal is running out faster than
usually assumed.
Finally, insofar as global peak oil and peak in natural gas are expected anywhere from
imminently to within decades at most, any increase in coal production (mining) per
annum to compensate for declines in oil or NG production, would necessarily translate to
an earlier date of peak as compared with peak coal under a scenario in which annual
production remains constant.
[edit] Fissionable materials
Main article: Peak uranium

In a paper in 1956 [15], after a review of US fissionable reserves, Hubbert notes of
nuclear power:
There is promise, however, provided mankind can solve its international

problems and not destroy itself with nuclear weapons, and provided world
population (which is now expanding at such a rate as to double in less than a
century) can somehow be brought under control, that we may at last have found
an energy supply adequate for our needs for at least the next few centuries of the
"foreseeable future."
Technologies such as the thorium fuel cycle, reprocessing and fast breeders can, in
theory, considerably extend the life of uranium reserves. Roscoe Bartlett claims [16]
Our current throwaway nuclear cycle uses up the world reserve of low-cost
uranium in about 20 years.
Caltech physics professor David Goodstein has stated [17] that
... you would have to build 10,000 of the largest power plants that are feasible by
engineering standards in order to replace the 10 terawatts of fossil fuel we're
burning today ... that's a staggering amount and if you did that, the known
reserves of uranium would last for 10 to 20 years at that burn rate. So, it's at best
a bridging technology ... You can use the rest of the uranium to breed plutonium
239 then we'd have at least 100 times as much fuel to use. But that means you're
making plutonium, which is an extremely dangerous thing to do in the dangerous
world that we live in.
[edit] Metals
Main article: Peak copper
Hubbert applied his theory to "rock containing an abnormally high concentration of a

given metal"[30] and reasoned that the peak production for metals such as copper, tin, lead,
zinc and others would occur in the time frame of decades and iron in the time frame of
two centuries like coal. The price of copper rose 500% between 2003 and 2007[31] was by
some attributed to peak copper.[32][33] Copper prices later fell, along with many other
commodities and stock prices, as demand shrank from fear of a golbal recession.[34]
Lithium availability is a concern for a fleet of Li-ion battery using cars but a paper
published in 1996 estimated that world reserves are adequate for at least 50 years [18]. A
similar prediction [19] for platinum use in fuel cells notes that the metal could be easily
recycled.
[edit] Phosphorus
Phosphorus supplies are essential to farming and depletion of reserves is estimated at
somewhere from 60 to 130 years [20]. Individual countries supplies vary widely; without
a recycling initiative America's supply [21] is estimated around 30 years [22]. Phosphorus
supplies affect total agricultural output which in turn limits alternative fuels such as
biodiesel and ethanol.
[edit] Peak water
Main article: Peak water
Hubbert's original analysis did not apply to renewable resources. However over-
exploitation often results in a Hubbert peak nonetheless. A modified Hubbert curve
applies to any resource that can be harvested faster than it can be replaced.[35]
For example, a reserve such as the Ogallala Aquifer can be mined at a rate that far
exceeds replenishment. This turns much of the world's underground water [23] and lakes
[24] into finite resources with peak usage debates similar to oil. These debates usually
center around agriculture and suburban water usage but generation of electricity [25]
from nuclear energy or coal and tar sands mining mentioned above is also water resource
intensive. The term fossil water is sometimes used to describe aquifers whose water is not
being recharged.
[edit] Renewable resources
Fisheries: At least one researcher has attempted to perform Hubbert linearization

(Hubbert curve) on the whaling industry, as well as charting the transparently
dependent price of caviar on sturgeon depletion. [36] Another example is the cod of
the North Sea. [37] The comparison of the cases of fisheries and of mineral
extraction tells us that the human pressure on the environment is causing a wide
range of resources to go through a depletion cycle which follows a Hubbert curve.
Environmental economics

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This box: view talk edit
Environmental economics is a subfield of economics concerned with environmental

issues. Quoting from the National Bureau of Economic Research Environmental
Economics program:
[...] Environmental Economics [...] undertakes theoretical or empirical studies of

the economic effects of national or local environmental policies around the world
[...]. Particular issues include the costs and benefits of alternative environmental
policies to deal with air pollution, water quality, toxic substances, solid waste,
and global warming.[1]
Contents
[hide]
1 Topics and concepts

o 1.1 Valuation
2 Solutions
3 Relationship to other fields
4 Professional bodies
5 See also
o 5.1 Hypotheses and theorems
6 References
7 Notes
8 External links
[edit] Topics and concepts
Central to environmental economics is the concept of market failure. Market failure

means that markets fail to allocate resources efficiently. As stated by Hanley, Shogren,
and White (2007) in their textbook Environmental Economics[2]: "A market failure occurs
when the market does not allocate scarce resources to generate the greatest social welfare.
A wedge exists between what a private person does given market prices and what society
might want him or her to do to protect the environment. Such a wedge implies
wastefulness or economic inefficiency; resources can be reallocated to make at least one
person better off without making anyone else worse off." Common forms of market
failure include externalities, non excludability and non rivalry.
Externality: the basic idea is that an externality exists when a person makes a choice that
affects other people that are not accounted for in the market price. For instance, a firm
emitting pollution will typically not take into account the costs that its pollution imposes
on others. As a result, pollution in excess of the 'socially efficient' level may occur. A
classic definition is provided by Kenneth Arrow (1969), who defines an externality as a
situation in which a private economy lacks sufficient incentives to create a potential
market in some good, and the nonexistence of this market results in the loss of
efficiency. In economic terminology, externalities are examples of market failures, in
which the unfettered market does not lead to an efficient outcome.
Common property and non-exclusion: When it is too costly to exclude people from
accessing a rivalrous environmental resource, market allocation is likely to be inefficient.
The challenges related with common property and non-exclusion have long been
recognized. Hardin's (1968) concept of the tragedy of the commons popularized the
challenges involved in non-exclusion and common property. "commons" refers to the
environmental asset itself, "common property resource" or "common pool resource"
refers to a property right regime that allows for some collective body to devise schemes
to exclude others, thereby allowing the capture of future benefit streams; and "open-
access" implies no ownership in the sense that property everyone owns nobody owns.
The basic problem is that if people ignore the scarcity value of the commons, they can
end up expending too much effort, over harvesting a resource (e.g., a fishery). Hardin
theorizes that in the absence of restrictions, users of an open-access resource will use it
more than if they had to pay for it and had exclusive rights, leading to environmental
degradation. See, however, Ostrom's (1990) work on how people using real common
property resources have worked to establish self-governing rules to reduce the risk of the
tragedy of the commons.[3]
Public goods and non-rivalry: Public goods are another type of market failure, in which
the market price does not capture the social benefits of its provision. For example,
protection from the risks of climate change is a public good since its provision is both
non-rival and non-excludable. Non-rival means climate protection provided to one
country does not reduce the level of protection to another country; non-excludable means
it is too costly to exclude any one from receiving climate protection. A country's incentive
to invest in carbon abatement is reduced because it can "free ride" off the efforts of other
countries. Over a century ago, Swedish economist Knut Wicksell (1896) first discussed
how public goods can be under-provided by the market because people might conceal
their preferences for the good, but still enjoy the benefits without paying for them.
GLOBAL GEOCHEMICAL CYCLES CRITICAL FOR LIFE
Nitrogen Cycle Water Cycle Carbon Cycle Oxygen Cycle
[edit] Valuation
Assessing the economic value of the environment is a major topic within the field. Use
and indirect use are tangible benefits accruing from natural resources or ecosystem
services (see the nature section of ecological economics). Non-use values include
existence, option, and bequest values. Those are also called "Intrinsic value" in "Deep
Ecology". For example, some people may value the existence of a diverse set of species,
regardless of the effect of the loss of a species on ecosystem services. The existence of
these species may have an option value, as there may be possibility of using it for some
human purpose (certain plants may be researched for drugs). Individuals may value the
ability to leave a pristine environment to their children.
Use and indirect use values can often be inferred from revealed behavior, such as the cost
of taking recreational trips or using hedonic methods in which values are estimated based
on observed prices. Non-use values are usually estimated using stated preference methods
such as contingent valuation or choice modelling. Contingent valuation typically takes
the form of surveys in which people are asked how much they would pay to observe and
recreate in the environment (willingness to pay) or their willingness to accept (WTA)
compensation for the destruction of the environmental good. Hedonic pricing examines
the effect the environment has on economic decisions through housing prices, traveling
expenses, and payments to visit parks.[4]
[edit] Solutions
Solutions advocated to correct such externalities include:
Environmental regulations. Under this plan the economic impact has to be

estimated by the regulator. Usually this is done using cost-benefit analysis. There
is a growing realization that regulations (also known as "command and control"
instruments) are not so distinct from economic instruments as is commonly
asserted by proponents of environmental economics. E.g.1 regulations are
enforced by fines, which operate as a form of tax if pollution rises above the
threshold prescribed. E.g.2 pollution must be monitored and laws enforced,
whether under a pollution tax regime or a regulatory regime. The main difference
an environmental economist would argue exists between the two methods,
however, is the total cost of the regulation. "Command and control" regulation
often applies uniform emissions limits on polluters, even though each firm has
different costs for emissions reductions. Some firms, in this system, can abate
inexpensively, while others can only abate at high cost. Because of this, the total
abatement has some expensive and some inexpensive efforts to abate.
Environmental economic regulations find the cheapest emission abatement efforts
first, then the more expensive methods second. E.g. as said earlier, trading, in the
quota system, means a firm only abates if doing so would cost less than paying
someone else to make the same reduction. This leads to a lower cost for the total
abatement effort as a whole.
Quotas on pollution. Often it is advocated that pollution reductions should be

achieved by way of tradeable emissions permits, which if freely traded may
ensure that reductions in pollution are achieved at least cost. In theory, if such
tradeable quotas are allowed, then a firm would reduce its own pollution load only
if doing so would cost less than paying someone else to make the same reduction.
In practice, tradeable permits approaches have had some success, such as the
U.S.'s sulphur dioxide trading program, though interest in its application is
spreading to other environmental problems.
Taxes and tariffs on pollution/Removal of "dirty subsidies". Increasing the costs of

polluting will discourage polluting, and will provide a "dynamic incentive", that
is, the disincentive continues to operate even as pollution levels fall. A pollution
tax that reduces pollution to the socially "optimal" level would be set at such a
level that pollution occurs only if the benefits to society (for example, in form of
greater production) exceeds the costs. Some advocate a major shift from taxation
from income and sales taxes to tax on pollution - the so-called "green tax shift".
Better defined property rights. The Coase Theorem states that assigning property
rights will lead to an optimal solution, regardless of who receives them, if
transaction costs are trivial and the number of parties negotiating is limited. For
example, if people living near a factory had a right to clean air and water, or the
factory had the right to pollute, then either the factory could pay those affected by
the pollution or the people could pay the factory not to pollute. Or, citizens could
take action themselves as they would if other property rights were violated. The
US River Keepers Law of the 1880s was an early example, giving citizens
downstream the right to end pollution upstream themselves if government itself
did not act (an early example of bioregional democracy). Many markets for
"pollution rights" have been created in the late twentieth century -- see emissions
trading. The assertion that defining property rights is a solution is controversial
within the field of environmental economics and environmental law and policy
more broadly; in Anglo-American and many other legal systems, one has the right
to carry out any action unless the law expressly proscribes it. Thus property rights
are already assigned (the factory that is polluting has a right to pollute).
[edit] Relationship to other fields
Environmental economics is related to ecological economics but there are differences.

Most environmental economists have been trained as economists. They apply the tools of
economics to address environmental problems, many of which are related to so-called
market failures--circumstances wherein the "invisible hand" of economics is unreliable.
Most ecological economists have been trained as ecologists, but have expanded the scope
of their work to consider the impacts of humans and their economic activity on ecological
systems and services, and vice-versa. This field takes as its premise that economics is a
strict subfield of ecology. Ecological economics is sometimes described as taking a more
pluralistic approach to environmental problems and focuses more explicitly on long-term
environmental sustainability and issues of scale.
These two groups of specialists sometimes have conflicting views which can often be
traced to the different philosophical underpinnings of the two fields. Some ecologists
subscribe to deontological ethical systems; other economists subscribe to teleological
ethical systems. Neither ethical system can be demonstrated to be right or wrong, but they
may sometimes have different implications for environmental policy. Environmental
economics is viewed as relatively more pragmatic in a price system; ecological
economics as relatively more idealistic as it supposedly does not use money to arbiter
decision making as much.
Another context in which externalities apply is when globalization permits one player in
a market who is unconcerned with biodiversity to undercut prices of another who is -
creating a "race to the bottom" in regulations and conservation. This in turn may cause
loss of natural capital with consequent erosion, water purity problems, diseases,
desertification, and other outcomes which are not efficient in an economic sense. This
concern is related to the subfield of sustainable development and its political relation, the
anti-globalization movement.
The three pillars of sustainability. Clickable.
Environmental economics was once distinct from resource economics. Natural resource
economics as a subfield began when the main concern of researchers was the optimal
commercial exploitation of natural resource stocks. But resource managers and policy-
makers eventually began to pay attention to the broader importance of natural resources
(e.g. values of fish and trees beyond just their commercial exploitation;, externalities
associated with mining). It is now difficult to distinguish "environmental" and "natural
resource" economics as separate fields as the two became associated with sustainability.
Many of the more radical green economists split off to work on an alternate political
economy.
Environmental economics was a major influence for the theories of natural capitalism and
environmental finance, which could be said to be two sub-branches of environmental
economics concerned with resource conservation in production, and the value of
biodiversity to humans, respectively. The theory of natural capitalism (Hawken, Lovins,
Lovins) goes further than traditional environmental economics by envisioning a world
where natural services are considered on par with physical capital.
The more radical Green economists reject neoclassical economics in favour of a new
political economy beyond capitalism or communism that gives a greater emphasis to the
interaction of the human economy and the natural environment, acknowledging that
"economy is three-fifths of ecology" - Mike Nickerson.
These more radical approaches would imply changes to money supply and likely also a
bioregional democracy so that political, economic, and ecological "environmental limits"
were all aligned, and not subject to the arbitrage normally possible under capitalism.
[edit] Professional bodies
The main academic and professional organizations for the discipline of Environmental
Economics are the Association of Environmental and Resource Economists (AERE) and
the European Association for Environmental and Resource Economics (EAERE). The
main academic and professional organization for the discipline of Ecological Economics
is the International Society for Ecological Economics (ISEE).
Kyoto Protocol
The Kyoto Protocol is a protocol to the United Nations Framework Convention on

Climate Change (UNFCCC or FCCC), an international environmental treaty produced at
the United Nations Conference on treaty is intended to achieve "stabilization of
greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous
anthropogenic interference with the climate system."[1] The Kyoto Protocol establishes
legally binding commitments for the reduction of four greenhouse gases (carbon dioxide,
methane, nitrous oxide, sulphur hexafluoride), and two groups of gases
(hydrofluorocarbons and perfluorocarbons) produced by "Annex I" (industrialized)
nations, as well as general commitments for all member countries. As of January 2009,
183 parties have ratified the protocol,[2] which was initially have been adopted for use on
11 December 1997 in Kyoto, Japan and which entered into force on 16 February 2005.
Under Kyoto, industrialized countries agreed to reduce their collective GHG emissions
by 5.2% compared to the year 1990. National limitations range from 8% reductions for
the European Union and some others to 7% for the United States, 6% for Japan, and 0%
for Russia. The treaty permitted GHG emission increases of 8% for Australia and 10%
for Iceland.[3]
Kyoto includes defined "flexible mechanisms" such as Emissions Trading, the Clean
Development Mechanism and Joint Implementation to allow Annex I economies to meet
their greenhouse gas (GHG) emission limitations by purchasing GHG emission
reductions credits from elsewhere, through financial exchanges, projects that reduce
emissions in non-Annex I economies, from other Annex I countries, or from Annex I
countries with excess allowances. In practice this means that Non-Annex I economies
have no GHG emission restrictions, but have financial incentives to develop GHG
emission reduction projects to receive "carbon credits" that can then be sold to Annex I
buyers, encouraging sustainable development.[4] In addition, the flexible mechanisms
allow Annex I nations with efficient, low GHG-emitting industries, and high prevailing
environmental standards to purchase carbon credits on the world market instead of
reducing greenhouse gas emissions domestically. Annex I entities typically will want to
acquire carbon credits as cheaply as possible, while Non-Annex I entities want to
maximize the value of carbon credits generated from their domestic Greenhouse Gas
Projects.
Among the Annex I signatories, all nations have established Designated National
Authorities to manage their greenhouse gas portfolios; countries including Japan, Canada,
Italy, the Netherlands, Germany, France, Spain and others are actively promoting
government carbon funds, supporting multilateral carbon funds intent on purchasing
Carbon Credits from Non-Annex I countries,[citation needed] and are working closely with their
major utility, energy, oil & gas and chemicals conglomerates to acquire Greenhouse Gas
Certificates as cheaply as possible.[citation needed] Virtually all of the non-Annex I countries
have also established Designated National Authorities to manage the Kyoto process,
specifically the "CDM process" that determines which GHG Projects they wish to
propose for accreditation by the CDM Executive Board.
Contents
[hide]
1 Objectives
2 Details of the agreement
o 2.1 Common but differentiated responsibility
o 2.2 Financial commitments
o 2.3 Emissions trading
o 2.4 Revisions
o 2.5 Enforcement
3 Current positions of governments
o 3.1 Australia
o 3.2 Canada
o 3.3 People's Republic of China
o 3.4 European Union
3.4.1 Germany
3.4.2 United Kingdom
3.4.3 France
o 3.5 Norway
o 3.6 India
o 3.7 Pakistan
o 3.8 Russia
o 3.9 United States
3.9.1 States and local governments
4 Support
5 Opposition
6 Cost-benefit analysis
o 6.1 Discount rates
7 Increase in greenhouse gas emission since 1990
8 Successor
9 Asia Pacific Partnership on Clean Development and Climate
10 See also
11 References
12 External links
[edit] Objectives
Kyoto is intended to cut global emissions of greenhouse gases.
The objective is the "stabilization and reconstruction of greenhouse gas concentrations in

the atmosphere at a level that would prevent dangerous anthropogenic interference with
the climate system."[1]
The objective of the Kyoto climate-change conference was to establish a legally binding
international agreement, whereby, all the participating nations commit themselves to
tackling the issue of global warming and reduce greenhouse gas emissions. The target
agreed upon at the summit was an average reduction of 5.2% from 1990 levels by the
year 2012.
The Intergovernmental Panel on Climate Change (IPCC) has predicted an average global
rise in temperature of 1.4C (2.5F) to 5.8C (10.4F) between 1990 and 2100.[5]
Proponents also note that Kyoto it is a first step[6][7] as requirements to meet the UNFCCC
will be modified until the objective is met, as required by UNFCCC Article 4.2(d).[8]
The treaty was negotiated in Kyoto, Japan in December 1997, opened for signature on 16
March 1998, and closed on 15 March 1999. The agreement came into force on 16
February 2005 following ratification by Russia on 18 November 2004. As of 14 January
2009, a total of 183 countries and 1 regional economic integration organization (the EC)
have ratified the agreement (representing over 63.7% of emissions from Annex I
countries).[2]
According to article 25 of the protocol, it enters into force "on the ninetieth day after the
date on which not less than 55 Parties to the Convention, incorporating Parties included
in Annex I which accounted in total for at least 55% of the total carbon dioxide emissions
for 1990 of the Parties included in Annex I, have deposited their instruments of
ratification, acceptance, approval or accession." Of the two conditions, the "55 parties"
clause was reached on 23 May 2002 when Iceland ratified. The ratification by Russia on
18 November 2004 satisfied the "55%" clause and brought the treaty into force, effective
16 February 2005. Australian Prime Minister Kevin Rudd ratified the Kyoto protocol on
3 December 2007. This came into effect after 90 days (the end of March 2008), as is
stated in the guidelines set by the United Nations.
This section requires expansion.
The five principle concepts of the Kyoto Protocol are:[citation needed]
Commitments The heart of the Protocol lies in establishing commitments for

the reduction of greenhouse gases that are legally binding for Annex I countries,
as well as general commitments for all member countries.
Implementation To meet the Protocol objectives, Annex I countries must
prepare policies and measures that reduce greenhouse gases. In addition, they
must increase absorption of these gases and use all mechanisms availablesuch
as joint implementation, clean development mechanism and emissions trading
to be rewarded with credits that allow more greenhouse gas emissions at home.
Minimizing Impacts on Developing Countries by establishing an adaptation fund
for climate change
Accounting, Reporting and Review to ensure the integrity of the Protocol
Compliance Establish a Compliance Committee to enforce compliance with
the commitments under the Protocol.
[edit] Details of the agreement
According to a press release from the United Nations Environment Programme:
After 10 days of tough negotiations, ministers and other high-level officials from 160
countries reached agreement this morning on a legally binding Protocol under which
industrialized countries will reduce their collective emissions of greenhouse gases by
5.2%. The agreement aims to lower overall emissions from a group of six greenhouse
gases by 2008-12, calculated as an average over these five years. Cuts in the three most
important gases - carbon dioxide (CO2), methane (CH4), and nitrous oxide (N20) - will
be measured against a base year of 1990. Cuts in three long-lived industrial gases -
hydrofluorocarbons (HFCs), [[perfluorocarbon]s (PFCs), and sulphur hexafluoride (SF6)
- can be measured against either a 1990 or 1995 baseline."
National limitations range from 8% reductions for the European Union and some others
to 7% for the US, 6% for Japan, 0% for Russia, and permitted increases of 8% for
Australia and 10% for Iceland.[3]
This agreement is an amendment to the United Nations Framework Convention on

Climate Change (UNFCCC, adopted at the Earth Summit in Rio de Janeiro in 1992). All
parties to the UNFCCC can sign or ratify the Kyoto Protocol, while non-parties to the
UNFCCC cannot. The Kyoto Protocol was adopted at the third session of the Conference
of Parties to the UNFCCC (COP3) in 1997 in Kyoto, Japan. Most provisions of the
Kyoto Protocol apply to developed countries, listed in Annex I to the UNFCCC.
Emission figures exclude international aviation and shipping.
[edit] Common but differentiated responsibility
The United Nations Framework Convention on Climate Change agreed to a set of a

"common but differentiated responsibilities." The parties agreed that:
1. The largest share of historical and current global emissions of greenhouse gases
originated in developed countries.
2. Per capita emissions in developing countries are still relatively low
3. The share of global emissions originating in developing countries will grow to
meet social and development needs.[9]
In other words, China, India, and other developing countries were not included in any
numerical limitation of the Kyoto Protocol because they weren't main contributors to the
greenhouse gas emissions during the pre-treaty industrialization period. (China has since
become the largest greenhouse gas emitter).[10] However, even without commitment to
reduce according to the Kyoto target, developing countries share the common
responsibility of all countries to reduce emissions.
The protocol defines a mechanism of "compliance", which means a "monitoring

compliance with the commitments and penalties for non-compliance."[11]
[edit] Financial commitments
The Protocol also reaffirms the principle that developed countries have to pay billions of
dollars, and supply technology to other countries for climate-related studies and projects.
This was originally agreed in the UNFCCC.
[edit] Emissions trading
Main article: Emissions trading
Kyoto is a 'cap and trade' system that imposes national caps on the emissions of Annex I
countries. On average, this cap requires countries to reduce their emissions 5.2% below
their 1990 baseline over the 2008 to 2012 period. Although these caps are national-level
commitments, in practice most countries will devolve their emissions targets to individual
industrial entities, such as a power plant or paper factory. One example of a 'cap and
trade' system is the 'EU ETS'. Other schemes may follow suit in time.
This means that the ultimate buyers of credits are often individual companies that expect
their emissions to exceed their quota (their Assigned Allocation Units, AAUs or
'allowances' for short). Typically, they will purchase credits directly from another party
with excess allowances, from a broker, from a JI/CDM developer, or on an exchange.
National governments, some of whom may not have devolved responsibility for meeting
Kyoto obligations to industry, and that have a net deficit of allowances, will buy credits
for their own account, mainly from JI/CDM developers. These deals are occasionally
done directly through a national fund or agency, as in the case of the Dutch government's
ERUPT programme, or via collective funds such as the World Banks Prototype Carbon
Fund (PCF). The PCF, for example, represents a consortium of six governments and 17
major utility and energy companies on whose behalf it purchases credits.
Since allowances and carbon credits are tradeable instruments with a transparent price,
financial investors can buy them on the spot market for speculation purposes, or link
them to futures contracts. A high volume of trading in this secondary market helps price
discovery and liquidity, and in this way helps to keep down costs and set a clear price
signal in CO2 which helps businesses to plan investments. This market has grown
substantially, with banks, brokers, funds, arbitrageurs and private traders now
participating in a market valued at about $60 billion in 2007.[12] Emissions Trading PLC,
for example, was floated on the London Stock Exchange's AIM market in 2005 with the
specific remit of investing in emissions instruments.
Although Kyoto created a framework and a set of rules for a global carbon market, there
are in practice several distinct schemes or markets in operation today, with varying
degrees of linkages among them.
Kyoto enables a group of several Annex I countries to join together to create a market-
within-a-market. The EU elected to be treated as such a group, and created the EU
Emissions Trading Scheme (ETS). The EU ETS uses EAUs (EU Allowance Units), each
equivalent to a Kyoto AAU. The scheme went into operation on 1 January 2005, although
a forward market has existed since 2003.
The UK established its own learning-by-doing voluntary scheme, the UK ETS, which ran
from 2002 through 2006. This market existed alongside the EU's scheme, and participants
in the UK scheme have the option of applying to opt out of the first phase of the EU ETS,
which lasts through 2007[citation needed].
The sources of Kyoto credits are the Clean Development Mechanism (CDM) and Joint
Implementation (JI) projects. The CDM allows the creation of new carbon credits by
developing emission reduction projects in Non-Annex I countries, while JI allows
project-specific credits to be converted from existing credits within Annex I countries.
CDM projects produce Certified Emission Reductions (CERs), and JI projects produce
Emission Reduction Units (ERUs), each equivalent to one AAU. Kyoto CERs are also
accepted for meeting EU ETS obligations, and ERUs will become similarly valid from
2008 for meeting ETS obligations (although individual countries may choose to limit the
number and source of CER/JIs they will allow for compliance purposes starting from
2008). CERs/ERUs are overwhelmingly bought from project developers by funds or
individual entities, rather than being exchange-traded like allowances.
Since the creation of Kyoto instruments is subject to a lengthy process of registration and
certification by the UNFCCC, and the projects themselves require several years to
develop, this market is at this point largely a forward market where purchases are made at
a discount to their equivalent currency, the EUA, and are almost always subject to
certification and delivery (although up-front payments are sometimes made). According
to IETA, the market value of CDM/JI credits transacted in 2004 was EUR 245 m; it is
estimated that more than EUR 620 m worth of credits were transacted in 2005.
Several non-Kyoto carbon markets are in existence or being planned, and these are likely
to grow in importance and numbers in the coming years. These include the New South
Wales Greenhouse Gas Abatement Scheme, the Regional Greenhouse Gas Initiative and
Western Climate Initiative in the United States and Canada, the Chicago Climate
Exchange and the State of Californias recent initiative to reduce emissions.
These initiatives, taken together may create a series of partly-linked markets, rather than
a single carbon market. The common theme across most of them is the adoption of
market-based mechanisms centered on carbon credits that represent a reduction of CO2
emissions. The fact that some of these initiatives have similar approaches to certifying
their credits makes it conceivable that carbon credits in one market may in the long run
be tradeable in other schemes. This would broaden the current carbon market far more
than the current focus on the CDM/JI and EU ETS domains. An obvious precondition,
however, is a realignment of penalties and fines to similar levels,since these create an
effective ceiling for each market.
[edit] Revisions
The protocol left several issues open to be decided later by the sixth Conference of
Parties (COP). COP6 attempted to resolve these issues at its meeting in the Hague in late
2000, but was unable to reach an agreement due to disputes between the European Union
on the one hand (which favoured a tougher agreement) and the United States, Canada,
Japan and Australia on the other (which wanted the agreement to be less demanding and
more flexible).
In 2001, a continuation of the previous meeting (COP6bis) was held in Bonn where the
required decisions were adopted. After some concessions, the supporters of the protocol
(led by the European Union) managed to get Japan and Russia in as well by allowing
more use of carbon dioxide sinks.
COP7 was held from 29 October 2001 through 9 November 2001 in Marrakech to
establish the final details of the protocol.
The first Meeting of the Parties to the Kyoto Protocol (MOP1) was held in Montreal from
28 November to 9 December 2005, along with the 11th conference of the Parties to the
UNFCCC (COP11). See United Nations Climate Change Conference.
The 3 December 2007, Australia ratified the protocol during the first day of the COP13 in
Bali.
Of the signatories, 36 developed C.G. countries (plus the EU as a party in the European
Union)agreed to a 10% emissions increase for Iceland; but, since the EU's member states
each have individual obligations,[13] much larger increases (up to 27%) are allowed for
some of the less developed EU countries (see below #Increase in greenhouse gas
emission since 1990).[14] Reduction limitations expire in 2013.
[edit] Enforcement
If the Enforcement Branch determines that an Annex I country is not in compliance with
its emissions limitation, then that country is required to make up the difference plus an
additional 30%. In addition, that country will be suspended from making transfers under
an emissions trading program.[15]
[edit] Current positions of governments
Carbon emissions from various global regions during the period 1800-2000 AD
See also: List of Kyoto Protocol signatories
[edit] Australia
Australia's new government elected after the November 2007 election fully supports the
protocol[16] and Prime Minister Kevin Rudd signed the instrument of ratification
immediately after assuming office on 3 December 2007, just before the meeting of the
UN Framework Convention on Climate Change;[17] it took effect in March, 2008.[18]
When still in Opposition, Kevin Rudd commissioned Professor Ross Garnaut to report
into the economic issues of reducing greenhouse gas emissions. Garnaut's report was
handed to the Australian Government on September 30, 2008. The Rudd Government's
position contrasts with the former Australian government, which declined to ratify the
Agreement arguing that the protocol would cost Australians jobs,[19] and due to countries
with booming economies and massive populations such as China and India not having
any reduction obligations. Further, it was claimed that Australia was already doing
enough to cut emissions; having pledged $300 million to reduce Greenhouse gas
emissions over three years.[citation needed]
Analysis has projected Australias greenhouse gas emissions at 109% of the 1990
emissions level over the period 200812, calculated including the effects of Land use,
land-use change and forestry (LULUCF). This is slightly above its 108% Kyoto Protocol
limitation. As of 2007, the UNFCCC is reporting that Australia's 2004 greenhouse gas
emissions were at 125.6% of 1990 levels, calculated without the LULUCF correction.[20]
The previous Australian Government, along with the United States, agreed to sign the
Asia Pacific Partnership on Clean Development and Climate at the ASEAN regional
forum on 28 July 2005. Furthermore, the Australian state of New South Wales (NSW)
commenced The NSW Greenhouse Gas Abatement Scheme (GGAS).[21] This mandatory
greenhouse gas emissions trading scheme commenced on 1 January 2003 and is currently
being trialled by the state government in NSW alone. Uniquely this scheme allows
Accredited Certificate Providers (ACP) to trade emissions from householders in the state.
As of 2006 the scheme is still in place despite the outgoing Prime Minister's clear
dismissal of emissions trading as a credible solution to climate change. Following the
example of NSW, the National Emissions Trading Scheme (NETS) has been established
as an initiative of State and Territory Governments of Australia, all of which have Labor
Party governments, except Western Australia.[22] The focus of NETS is to bring into
existence an intra-Australian carbon trading scheme and to coordinate policy
developments to this end. As the text of the Constitution of Australia,[23] does not refer
specifically to environmental matters (apart from water), the allocation of responsibility
is resolved at a political level. During the later years of the Howard administration (1996-
2007) the Labor governed States took steps to establish a NETS (a) to take action in a
field where there were few mandatory federal steps being taken and (b) as a means of
facilitating ratification of the Kyoto Protocol by the incoming Labor Government.
Greenpeace have called Clause 3.7 of the Kyoto Protocol the "Australia Clause", as
Australia was the major beneficiary. The clause allows for Annex 1 countries with high
rates of land clearing in 1990 to consider that year a base level. Greenpeace argues that
Australia had extremely high levels of land clearing in 1990, and that this meant that
Australia's "baseline" was unusually high compared to other countries.[24]
In May 2009 Kevin Rudd has delayed and changed the content of the CPRS (Carbon
Pollution Reduction Scheme):[25]
One year delay in the start of the scheme to 2011/2012 (previously: 1 July 2010)
One year fixed price period of AU$10 per permit in 2011/2012 (previously:
flexible price with $40 price cap)
Unlimited amount of permits available from the government during this first year
(previously: est. 300 million tCo2e to be auctioned)
Higher percentage of permits to be handed out, rather than auctioned (previously
60% or 90% depending on)
Compensation cancelled for 2010/2011 and reduced in 2011/2012
Households can reduce their carbon footprint by buying and retiring permits into
an Australian Carbon Trust (previously not included).
Subject to an international agreement, Australia to commit to a -25% reduction
from 2000 levels by 2020 (previously -15%)
5% of this 25% could be achieved by the Government purchase of international
offsets (previously not included).
[edit] Canada
On 17 December 2002, Canada ratified the treaty that came into force in February 2005,
requiring it to reduce emissions to 6% below 1990 levels during the 2008-2012
commitment period. At that time, numerous polls showed support for the Kyoto protocol
at around 70%.[26][27] Despite strong public support, there was still some opposition,
particularly by the Canadian Alliance, precursor to the governing Conservative Party,
some business groups,[28] and energy concerns, using arguments similar to those being
used in the U.S.. In particular, there was a fear that since U.S. companies would not be
affected by the Kyoto Protocol that Canadian companies would be at a disadvantage in
terms of trade. In 2005, the result was limited to an ongoing "war of words", primarily
between the Province of Alberta (Canada's primary oil and gas producer) and the federal
government. As of 2003, the federal government claimed to have spent or committed 3.7
billion dollars on climate change programmes.[29] By 2004, CO2 emissions had risen to
27% above 1990 levels (which compares unfavorably to the 16% increase in emissions
by the United States during that time).[30] By 2006 they were down to 21.7% above 1990
levels[31]
In January 2006, a Conservative minority government under Stephen Harper was elected,
who previously has expressed opposition to Kyoto, and in particular to the plan to
participate in international emission trading. Rona Ambrose, who replaced Stphane Dion
as the environment minister, has since endorsed some types of emission trading, and
indicated interest in international trading.[32] On 25 April 2006, Ambrose announced that
Canada would have no chance of meeting its targets under Kyoto, and would look to
participate in U.S. sponsored Asia-Pacific Partnership on Clean Development and
Climate. "We've been looking at the Asia-Pacific Partnership for a number of months
now because the key principles around [it] are very much in line with where our
government wants to go," Ambrose told reporters.[33] On 2 May 2006, it was reported that
environmental funding designed to meet the Kyoto standards had been cut, while the
Harper government develops a new plan to take its place.[34] As the co-chair of UN
Climate Change Conference in Nairobi in November 2006, Canada and its government
received criticism from environmental groups and from other governments for its climate
change positions.[35] On 4 January 2007, Rona Ambrose moved from the Ministry of the
Environment to become Minister of Intergovernmental Affairs. The Environment
portfolio went to John Baird, the former President of the Treasury Board.
Canada's federal government has introduced legislation to set mandatory emissions

targets for industry, but it will not take effect until 2012, with a benchmark date of 2006
as opposed to Kyoto's 1990. The government has since begun working with opposition
parties to improve the legislation.
A private member's bill,[36] was put forth by Pablo Rodriguez, Liberal, aiming to force the
government to "ensure that Canada meets its global climate change obligations under the
Kyoto Protocol." With the support of the Liberals, the New Democratic Party and the
Bloc Qubcois, and with the current minority situation, the bill passed the House of
Commons on 14 February 2007 with a vote of 161-113.[37] The Senate passed the bill and
it received Royal Assent on 22 June 2007.[38] However, the Government, as promised, has
largely ignored the bill, which was to force the Government 60 days to form a detailed
plan of action, citing economic reasons.[39][40]
In May 2007 Friends of the Earth sued the Canadian federal government for failing to
meet its Kyoto Protocol obligations to cut greenhouse gas emissions linked to global
warming. This was based on a clause in the Canadian Environmental Protection Act that
requires Ottawa to "prevent air pollution that violates an international agreement binding
on Canada".[41] Canada's obligation to the treaty began in 2008.
Regardless of the national position, some individual provinces are pursuing policies to
restrain emissions, including Quebec,[42] Ontario, British Columbia and Manitoba as part
of the Western Climate Initiative.
[edit] People's Republic of China
As of August 27, 2008 China surpassed the United States as the worlds biggest emitter of
CO2 from power generation, according to new data from the Center for Global
Development (CGD).[43] Although, on a per capita basis, U.S. power-sector emissions are
still nearly four times those of China. The worlds top-ten power sector emitters in
absolute terms are China, the United States, India, Russia, Germany, Japan, the United
Kingdom, Australia, South Africa, and South Korea. If the 27 member states of the
European Union are counted as a single country, the E.U. would rank as the third biggest
CO2 polluter, after China and the United States. In per capita terms, emissions from the
U.S. power sector are the second highest in the world. Americans electricity usage
produces about 9.5 tons of CO2 per person per year, compared to 2.4 tons per person per
year in China, 0.6 in India, and 0.1 in Brazil. Average per capita emissions from
electricity and heat production in the EU is 3.3 tons per year. Only Australia, at greater
than 10 tons per year, emits more power-related emissions per person than the U.S.
In a related report, Canadian economists Jeff Rubin and Benjamin Tal recently issued a
report, The Carbon Tariff[44] Relying on data from a variety of sources, including the U.S.
Energy Information Administration, Rubin and Tal ground their proposal for a carbon
tariff in striking facts, including the following:
Chinas GHG emissions have increased by 120% since the beginning of the
decade, while U.S. emissions have barely changed over the same period.
China now exceeds the United States as the single largest GHG emitter, and
accounts for more than a fifth of global GHG emissions.
China relies more heavily on coal-fired power plants, the most GHG-intensive
energy source, than do most OECD countries. Between now and 2012, the
increase in Chinese coal-based emissions will exceed the entire level of coal-
based emissions in the United States.
In June 2007, China unveiled a 62-page climate change plan and promised to put climate
change at the heart of its energy policies and insisted that developed countries had an
unshirkable responsibility to take the lead on cutting greenhouse gas emissions and that
the "common but differentiated responsibility" principle, as agreed up in the UNFCCC
should be applied.[45][46]
In response to critics of the nation's energy policy, China responded that those criticisms
were unjust,[47] while studies of carbon leakage suggest that nearly a quarter of China's
emissions result from exports for consumption by developed countries.[48]
[edit] European Union
See also: Energy policy of the European Union
On 31 May 2002, all fifteen then-members of the European Union deposited the relevant
ratification paperwork at the UN. The EU produces around 22% of global greenhouse gas
emissions, and has agreed to a cut, on average, by 8% from 1990 emission levels.
Denmark has committed itself to reducing its emissions by 21%. On 10 January 2007, the
European Commission announced plans for a European Union energy policy that
included a unilateral 20% reduction in GHG emissions by 2020.
The EU has consistently been one of the major nominal supporters of the Kyoto Protocol,
negotiating hard to get wavering countries on board.
In December 2002, the EU created an emissions trading system in an effort to meet these
tough targets. Quotas were introduced in six key industries: energy, steel, cement, glass,
brick making, and paper/cardboard. There are also fines for member nations that fail to
meet their obligations, starting at 40/ton of carbon dioxide in 2005, and rising to
100/ton in 2008. Current EU projections suggest that by 2008 the EU will be at 4.7%
below 1990 levels.
Transport CO2 emissions in the EU grew by 32% between 1990 and 2004. The share of
transport in CO2 emissions was 21% in 1990, but by 2004 this had grown to 28%.
The position of the EU is not without controversy in Protocol negotiations, however. One
criticism is that, rather than reducing 8%, all the EU member countries should cut 15% as
the EU insisted a uniform target of 15% for other developed countries during the
negotiation while allowing itself to share a big reduction in the former East Germany to
meet the 15% goal for the entire EU. Also, emission levels of former Warsaw Pact
countries who now are members of the EU have already been reduced as a result of their
economic restructuring. This may mean that the region's 1990 baseline level is inflated
compared to that of other developed countries, thus giving European economies a
potential competitive advantage over the U.S.
Both the EU (as the European Community) and its member states are signatories to the
Kyoto treaty.
Greece, however was excluded from the Kyoto Protocol on Earth Day (22 April 2008)
due to unfulfilled commitment of creating the adequate mechanisms of monitoring and
reporting emissions, which is the minimum obligation, and delivering false reports by
having no other data to report. A United Nations committee has decided to reinstate
Greece in the emissions-trading system of the Kyoto Protocol after a seven-month
suspension (on November 15).
[edit] Germany
Germany has reduced gas emissions by 22.4% between 1990 and 2008.[49] On 28 June
2006, the German government announced it would exempt its coal industry from
requirements under the EU internal emission trading system. Claudia Kemfert, an energy
professor at the German Institute for Economic Research in Berlin said, "For all its
support for a clean environment and the Kyoto Protocol, the cabinet decision is very
disappointing. The energy lobbies have played a big role in this decision."[50] However,
Germany's voluntary commitment to reduce CO2 emissions by 21 per cent compared to
1990 levels has to all intents and purposes been met, because emissions have already
been reduced by 19 per cent. Germany is thus contributing 75 per cent of the eight per
cent reduction promised by the EU [51]
[edit] United Kingdom
The energy policy of the United Kingdom fully endorses goals for carbon dioxide
emissions reduction and has committed to proportionate reduction in national emissions
on a phased basis. The United Kingdom is a signatory to the Kyoto Protocol.
On 13 March 2007, a draft Climate Change Bill was published after cross-party pressure
over several years, led by environmental groups. Informed by the Energy White Paper
2003,[52] The Bill aims to put in place a framework to achieve a mandatory 60% cut in the
UK's carbon emissions by 2050 (compared to 1990 levels), with an intermediate target of
between 26% and 32% by 2020.[53] On the 26th November 2008, the Climate Change Act
became law setting up a target of 80% reduction over 1990.[54] The United Kingdom is the
first country to set up such a long-range and significant carbon reduction target into law.
The UK currently appears on course to meet its Kyoto limitation for the basket of
greenhouse gases, assuming the Government is able to curb rising carbon dioxide
emissions between now (2007) and the period 2008-2012.[55] Although the UK's overall
greenhouse gas emissions have fallen, annual net carbon dioxide emissions have risen by
around 2% since The Labour Party came to power in 1997.[55] As a result it now seems
highly unlikely that the Government will be able to honour its manifesto pledge to cut
carbon dioxide emissions by 20% from 1990 levels by the year 2010,[55] unless immediate
and drastic action is taken under after the passing of the Climate Change Bill.
[edit] France
In 2004, France shut down its last coal mine, and now gets 80% of its electricity from
nuclear power[56] and therefore has relatively low CO2 emissions.[57]
[edit] Norway
Between 1990 and 2007, Norway's greenhouse gas emissions increased by 12%.[58] As
well as directly reducing their own greenhouse gas emissions, Norway's idea for carbon
neutrality is to finance reforestation in China, a legal provision of the Kyoto protocol.
[edit] India
See also: Energy policy of India
India signed and ratified the Protocol in August, 2002. Since India is exempted from the
framework of the treaty, it is expected to gain from the protocol in terms of transfer of
technology and related foreign investments. At the G8 meeting in June 2005, Indian
Prime Minister Manmohan Singh pointed out that the per-capita emission rates of the
developing countries are a tiny fraction of those in the developed world. Following the
principle of common but differentiated responsibility, India maintains that the major
responsibility of curbing emission rests with the developed countries, which have
accumulated emissions over a long period of time. However, the U.S. and other Western
nations assert that India, along with China, will account for most of the emissions in the
coming decades, owing to their rapid industrialization and economic growth.
[edit] Pakistan
Although at first unwilling, Pakistan's Minister of State for environment Malik Min
Aslam convinced the Shaukat Aziz Cabinet to ratify the Protocol. The decision was taken
in 2001 but due to international circumstances it was announced in Argentina in 2004 and
accepted in 2005, opening the way for the creation of a policy framework. On 11 January,
2005 Pakistan deposited its instruments of accession to the Kyoto Protocol. Ministry of
Environment assigned the task to work as Designated National Authority (DNA). After
that in February, 2006, National CDM Operational Strategy was approved and on 27
April, 2006 first CDM project was approved by DNA, it was reduction of large N2O
from nitric acid production (investor: Mitsubishi, Japan) estimating 1 million CERs
annually. Then finally in November, 2006, first CDM Project was registered with United
Nations Framework Convention on Climate Change (UNFCCC).
After that all the Industry owners attracted towards it as it helps the environment and a
good and easy way of earning. Few industry owners even took huge steps and
commissioned a plant, like Almoiz Industries Limited, having worlds latest equipment,
which resulted "a State of the Art". That plant remarkably distinct Pakistan in whole
south Asia.
It was expected that the protocol would help Pakistan achieve lower dependence on fossil
fuels through the provision of support for renewable energy projects. Although Pakistan
was not a big polluter, it was a victim. Global warming had led to 'freak weather' in the
country with record breaking cold and heat, resulting in droughts and floods.[citation needed]
[edit] Russia
See also: Energy policy of Russia
Vladimir Putin approved the treaty on 4 November 2004, and Russia officially notified
the United Nations of its ratification on 18 November 2004. The issue of Russian
ratification was particularly closely watched in the international community, as the accord
was brought into force 90 days after Russian ratification (16 February 2005).
President Putin had earlier decided in favor of the protocol in September 2004, along
with the Russian cabinet,[59] against the opinion of the Russian Academy of Sciences, of
the Ministry for Industry and Energy, and of the then-president's economic adviser,
Andrey Illarionov, and in exchange for the EU's support for Russia's admission into the
WTO.[60][61] As anticipated, after this, ratification by the lower (22 October 2004) and
upper house of parliament did not encounter any obstacles.
The Kyoto Protocol limits emissions to a percentage increase or decrease from their 1990
levels. Since 1990, the economies of most countries in the former Soviet Union have
collapsed, as have their greenhouse gas emissions. Because of this, Russia should have no
problem meeting its commitments under Kyoto, as its current emission levels are
substantially below its limitations.
There is an ongoing scientific debate on whether Russia will actually gain from selling
credits for unused AAUs.
[edit] United States
See also: Energy policy of the United States
The United States (U.S.), although a signatory to the Kyoto Protocol, has neither ratified
nor withdrawn from the Protocol. The signature alone is merely symbolic, as the Kyoto
Protocol is non-binding on the United States unless ratified. The United States was, as of
at least 2005, the largest per capita emitter of carbon dioxide from the burning of fossil
fuels.[62] The America's Climate Security Act of 2007, also more commonly referred to in
the U.S. as the "Cap and Trade Bill", was proposed for greater U.S. alignment with the
Kyoto standards and goals. The current bill is almost 500 pages long, and provides for
establishment of a federal bureau of Carbon Trading, Regulation, and Enforcement with
mandates which some authorities suggest will amount to the largest tax increase in the
history of the United States.[63]
On 25 July 1997, before the Kyoto Protocol was finalized (although it had been fully
negotiated, and a penultimate draft was finished), the U.S. Senate unanimously passed by
a 950 vote the Byrd-Hagel Resolution (S. Res. 98),[64][65] which stated the sense of the
Senate was that the United States should not be a signatory to any protocol that did not
include binding targets and timetables for developing nations as well as industrialized
nations or "would result in serious harm to the economy of the United States". On 12
November 1998, Vice President Al Gore symbolically signed the protocol. Both Gore and
Senator Joseph Lieberman indicated that the protocol would not be acted upon in the
Senate until there was participation by the developing nations.[66] The Clinton
Administration never submitted the protocol to the Senate for ratification.
The Clinton Administration released an economic analysis in July 1998, prepared by the
Council of Economic Advisors, which concluded that with emissions trading among the
Annex B/Annex I countries, and participation of key developing countries in the "Clean
Development Mechanism"which grants the latter business-as-usual emissions rates
through 2012the costs of implementing the Kyoto Protocol could be reduced as much
as 60% from many estimates. Estimates of the cost of achieving the Kyoto Protocol
carbon reduction targets in the United States, as compared by the Energy Information
Administration (EIA), predicted losses to GDP of between 1.0% and 4.2% by 2010,
reducing to between 0.5% and 2.0% by 2020. Some of these estimates assumed that
action had been taken by 1998, and would be increased by delays in starting action.[67]
President George W. Bush did not submit the treaty for Senate ratification based on the
exemption granted to China (now the world's largest gross emitter of carbon dioxide,
although emission is low per capita[68]). Bush opposed the treaty because of the strain he
believed the treaty would put on the economy; he emphasized the uncertainties which he
believed were present in the scientific evidence. Furthermore, the U.S. was concerned
with broader exemptions of the treaty. For example, the U.S. did not support the split
between Annex I countries and others. Bush said of the treaty:
This is a challenge that requires a 100% effort; ours, and the rest of the world's. The
world's second-largest emitter of greenhouse gases is the People's Republic of China. Yet,
China was entirely exempted from the requirements of the Kyoto Protocol. India and
Germany are among the top emitters. Yet, India was also exempt from Kyoto ...
America's unwillingness to embrace a flawed treaty should not be read by our friends and
allies as any abdication of responsibility. To the contrary, my administration is committed
to a leadership role on the issue of climate change ... Our approach must be consistent
with the long-term goal of stabilizing greenhouse gas concentrations in the
atmosphere."[69]
In June 2002, the Environmental Protection Agency released the "Climate Action Report
2002". Some observers have interpreted this report as being supportive of the protocol,
although the report itself does not explicitly endorse the protocol.[citation needed] At the G8
meeting in June 2005 administration officials expressed a desire for "practical
commitments industrialized countries can meet without damaging their economies".
According to those same officials, the United States is on track to fulfill its pledge to
reduce its carbon intensity 18% by 2012.[70] The United States has signed the Asia Pacific
Partnership on Clean Development and Climate, a pact that allows those countries to set
their goals for reducing greenhouse gas emissions individually, but with no enforcement
mechanism. Supporters of the pact see it as complementing the Kyoto Protocol while
being more flexible.
The Administration's position was not uniformly accepted in the U.S. For example, Paul
Krugman noted that the target 18% reduction in carbon intensity is still actually an
increase in overall emissions.[71] The White House has also come under criticism for
downplaying reports that link human activity and greenhouse gas emissions to climate
change and that a White House official, former oil industry advocate and current Exxon
Mobil officer, Philip Cooney, watered down descriptions of climate research that had
already been approved by government scientists, charges the White House denies.[72]
Critics point to the Bush administration's close ties to the oil and gas industries. In June
2005, State Department papers showed the administration thanking Exxon executives for
the company's "active involvement" in helping to determine climate change policy,
including the U.S. stance on Kyoto. Input from the business lobby group Global Climate
Coalition was also a factor.[73]
In 2002, Congressional researchers who examined the legal status of the Protocol advised
that signature of the UNFCCC imposes an obligation to refrain from undermining the
Protocol's object and purpose, and that while the President probably cannot implement
the Protocol alone, Congress can create compatible laws on its own initiative.[74]
President Barack Obama has, as yet, taken no action with the senate that would change
the position of the United States towards this protocol. When Obama was in Turkey in
April 2009, he said that "it doesn't make sense for the United States to sign [the Kyoto
Protocol] because [it] is about to end".[75] At this time, two years and eleven months
remained from the four-year commitment period.
[edit] States and local governments
The Framework Convention on Climate Change is a treaty negotiated between countries

at the UN; thus individual states are not free to participate independently within this
Protocol to the treaty. Nonetheless, several separate initiatives have started at the level of
state or city. Eight Northeastern U.S. states created the Regional Greenhouse Gas
Initiative (RGGI),[76] a state level emissions capping and trading program, using their own
independently-developed mechanisms. Their first allowances were auctioned in
November 2008.
Participating states: Maine, New Hampshire, Vermont, Connecticut, New York,

New Jersey, Delaware, Massachusetts, and Maryland (these states represent over
46 million people, 20% of the US population).
Observer states and regions: Pennsylvania, District of Columbia, Rhode Island.
On 27 September 2006, California Governor Arnold Schwarzenegger signed into law the
bill AB 32, also known as the Global Warming Solutions Act, establishing a timetable to
reduce the state's greenhouse-gas emissions, which rank at 12th-largest in the world, by
25% by the year 2020. This law effectively puts California in line with the Kyoto
limitations, but at a date later than the 2008-2012 Kyoto commitment period. Many of the
features of the Californian system are similar to the Kyoto mechanisms, although the
scope and targets are different. The parties in the Western Climate Initiative expect to be
compatible with some or all of the Californian model.
As of 14 June 2009, 944 U.S. cities in 50 states, the District of Columbia and Puerto
Rico, representing over 80 million Americans support Kyoto after Mayor Greg Nickels of
Seattle started a nationwide effort to get cities to agree to the protocol.[77] On 29 October
2007, it was reported that Seattle met their target reduction in 2005, reducing their
greenhouse gas emissions by 8 percent since 1990.[78]
Large participating cities: Albany, New York; Albuquerque, New

Mexico;Alexandria, Virginia; Ann Arbor, Michigan; Arlington, Texas; Atlanta,
Georgia; Austin, Texas; Baltimore, Maryland; Berkeley, California; Boston,
Massachusetts; Charleston, South Carolina;Chattanooga, Tennessee; Chicago,
Illinois; Cincinnati, Ohio; Columbus, Ohio; Dallas, Texas; Denver, Colorado; Des
Moines, Iowa; Fayetteville, Arkansas; Hartford, Connecticut; Honolulu, Hawaii;
Indianapolis, Indiana; Jersey City, New Jersey; Lansing, Michigan; Las Vegas,
Nevada; Lexington, Kentucky; Lincoln, Nebraska; Little Rock, Arkansas; Los
Angeles, California; Louisville, Kentucky; Madison, Wisconsin; Miami, Florida;
Milwaukee, Wisconsin; Minneapolis, Minnesota; Nashville, Tennessee; New
Orleans, Louisiana; New York, New York; Oakland, California; Omaha,
Nebraska; Pasadena, California; Philadelphia, Pennsylvania; Phoenix, Arizona;
Pittsburgh, Pennsylvania; Portland, Oregon; Providence, Rhode Island;
Richmond, Virginia; Sacramento, California; Salt Lake City, Utah; San Antonio,
Texas; San Francisco, California; San Jose, California; Santa Ana, California;
Santa Fe, New Mexico; Seattle, Washington; St. Louis, Missouri; Tacoma,
Washington; Tallahassee, Florida; Tampa, Florida; Topeka, Kansas; Tulsa,
Oklahoma; Virginia Beach, Virginia; Washington, D.C.; West Palm Beach,
Florida; Wilmington, Delaware; Wilmington, North Carolina.
There is a full list of cities and mayors.[77]
[edit] Support
Advocates of the Kyoto Protocol state that reducing these emissions is crucially
important, as carbon dioxide is causing the earth's atmosphere to heat up. This is
supported by attribution analysis.
Most prominent among advocates of Kyoto have been the European Union and many
environmentalist organizations. The United Nations and some individual nations'
scientific advisory bodies (including the G8 national science academies) have also issued
reports favoring the Kyoto Protocol.
An international day of action was planned for 3 December 2005, to coincide with the
Meeting of the Parties in Montreal. The planned demonstrations were endorsed by the
Assembly of Movements of the World Social Forum.
A group of major Canadian corporations also called for urgent action regarding climate
change, and have suggested that Kyoto is only a first step.[79]
In the United States, there is at least one student group, Kyoto Now!, which aims to use
student interest to support pressure towards reducing emissions as targeted by the Kyoto
Protocol compliance.
[edit] Opposition
Some argue the protocol does not go far enough to curb greenhouse emissions (Niue, The
Cook Islands, and Nauru added notes to this effect when signing the protocol).[80]
Some environmental economists have been critical of the Kyoto Protocol.[81][82][83] Many
see the costs of the Kyoto Protocol as outweighing the benefits, some believing the
standards which Kyoto sets to be too optimistic, others seeing a highly inequitable and
inefficient agreement which would do little to curb greenhouse gas emissions.[84] Finally,
some economists such as Gwyn Prins and Steve Rayner think that an entirely different
approach needs to be followed than the approach suggested by the Kyoto Protocol.[85]
Further, there is controversy surrounding the use of 1990 as a base year[citation needed], as well
as not using per capita emissions as a basis. Countries had different achievements in
energy efficiency in 1990. For example, the former Soviet Union and eastern European
countries did little to tackle the problem and their energy efficiency was at its worst level
in 1990, the year just before their communist regimes fell. On the other hand, Japan, as a
big importer of natural resources, had to improve its efficiency after the 1973 oil crisis
and its emissions level in 1990 was better than most developed countries. However, such
efforts were set aside, and the inactivity of the former Soviet Union was overlooked and
could even generate big income due to the emission trade. There is an argument that the
use of per capita emissions as a basis in the following Kyoto-type treaties can reduce the
sense of inequality among developed and developing countries alike, as it can reveal
inactivities and responsibilities among countries.
[edit] Cost-benefit analysis
Economists have been trying to analyze the overall net benefit of Kyoto Protocol through
cost-benefit analysis. There is disagreement due to large uncertainties in economic
variables.[86] Some of the estimates indicate either that observing the Kyoto Protocol is
more expensive than not observing the Kyoto Protocol or that the Kyoto Protocol has a
marginal net benefit which exceeds the cost of simply adjusting to global warming.[citation
needed]
However, a study by De Leo et al. found that "accounting only for local external
costs, together with production costs, to identify energy strategies, compliance with the
Kyoto Protocol would imply lower, not higher, overall costs."[87]
The recent Copenhagen consensus project found that the Kyoto Protocol would slow
down the process of global warming, but have a superficial overall benefit. Defenders of
the Kyoto Protocol argue, however, that while the initial greenhouse gas cuts may have
little effect, they set the political precedent for bigger (and more effective) cuts in the
future.[88] They also advocate commitment to the precautionary principle. Critics point out
that additional higher curbs on carbon emission are likely to cause significantly higher
increase in cost, making such defense moot. Moreover, the precautionary principle could
apply to any political, social, economic or environmental consequence, which might have
equally devastating effect in terms of poverty and environment, making the precautionary
argument irrelevant. The Stern Review (a UK government sponsored report into the
economic impacts of climate change) concluded that one percent of global GDP is
required to be invested to mitigate the effects of climate change, and that failure to do so
could risk a recession worth up to twenty percent of global GDP.[89]
[edit] Discount rates
One problem in attempting to measure the "absolute" costs and benefits of different
policies to global warming is choosing a proper discount rate. Over a long time horizon
such as that in which benefits accrue under Kyoto, small changes in the discount rate
create very large discrepancies between net benefits in various studies. However, this
difficulty is generally not applicable to "relative" comparison of alternative policies under
a long time horizon. This is because changes in discount rates tend to equally adjust the
net cost/benefit of different policies unless there are significant discrepancies of cost and
benefit over time horizon.
It has been difficult to arrive at a scenario under which the net benefits of Kyoto are
positive using traditional discounting methods such as the Shadow Price of Capital
approach,[90].
[edit] Increase in greenhouse gas emission since 1990
Below is a list of the change in greenhouse gas emissions from 1990 to 2004 for some
countries that are part of the Climate Change Convention as reported by the United
Nations.[91]
Change in Change in
greenhouse gas greenhouse gas
EU Assigned
Emissions (1990- Emissions (1990- Treaty Obligation
Country Objective
2004) 2004) 2008-2012
for 2012
excluding including
LULUCF LULUCF
Denmark -19% -22.2% -20% -11%
Germany -17% -18.2% -21% -8%
Canada +27% +26.6% n/a -6%
Australia +25% +5.2% n/a +8%
Spain +49% +50.4% +15% -8%
Norway +10% -18.7% n/a +1%
New Zealand +21% +17.9% n/a 0%
France -0.8% -6.1% 0% -8%
Greece +27% +25.3% +25% -8%
Ireland +23% +22.7% +13% -8%
Japan +6.5% +5.2% n/a -6%
United
-14% -58.8% -12.5% -8%
Kingdom
Portugal +41% +28.9% +27% -8%
EU-15 -0.8% -2.6% n/a -8%
Below is a table of the changes in greenhouse gas emissions of some countries.[92]
Change in greenhouse gas

Country
Emissions (1992-2007)
India +103%
China +150%
United States +20%
Russian Federation -20%
Japan +11%
Worldwide Total +38%
Comparing total greenhouse gas emissions in 2004 to 1990 levels, the U.S. emissions
were up by 15.8%,[93] with irregular fluctuations from one year to another but a general
trend to increase.[94] At the same time, the EU group of 23 (EU-23) Nations had reduced
their emissions by 5%.[95] In addition, the EU-15 group of nations (a large subset of EU-
23) reduced their emissions by 0.8% between 1990 and 2004, while emission rose 2.5%
from 1999 to 2004. Part of the increases for some of the European Union countries are
still in line with the treaty, being part of the cluster of countries implementation (see
objectives in the list above).
As of year-end 2006, the United Kingdom and Sweden were the only EU countries on
pace to meet their Kyoto emissions commitments by 2010. While UN statistics indicate
that, as a group, the 36 Kyoto signatory countries can meet the 5% reduction target by
2012, most of the progress in greenhouse gas reduction has come from the stark decline
in Eastern European countries' emissions after the fall of communism in the 1990s.[96]
[edit] Successor
Main article: Post-Kyoto Protocol negotiations on greenhouse gas emissions
In the non-binding 'Washington Declaration' agreed on 16 February 2007, Heads of

governments from Canada, France, Germany, Italy, Japan, Russia, United Kingdom, the
United States, Brazil, China, India, Mexico and South Africa agreed in principle on the
outline of a successor to the Kyoto Protocol. They envisage a global cap-and-trade
system that would apply to both industrialized nations and developing countries, and
hoped that this would be in place by 2009.[97][98]
On 7 June 2007, leaders at the 33rd G8 summit agreed that the G8 nations would 'aim to
at least halve global CO2 emissions by 2050'. The details enabling this to be achieved
would be negotiated by environment ministers within the United Nations Framework
Convention on Climate Change in a process that would also include the major emerging
economies.[99]
A round of climate change talks under the auspices of the United Nations Framework
Convention on Climate Change (UNFCCC) (Vienna Climate Change Talks 2007)
concluded in 31 August 2007 with agreement on key elements for an effective
international response to climate change.[100]
A key feature of the talks was a United Nations report that showed how energy efficiency
could yield significant cuts in emissions at low cost.
The talks are meant to set the stage for a major international meeting to be held in Nusa
Dua, Bali, which started on 3 December 2007.[101]
The 2008 Conference was held in December 2008 in Pozna, Poland. One of the main
topics on this meeting was the discussion of a possible implementation of avoided
deforestation also known as Reducing emissions from deforestation and forest
degradation (REDD) into the future Kyoto Protocol. [102]
UN negotiations are now gathering pace in advance of a key meeting in Copenhagen in

December 2009.[103]
[edit] Asia Pacific Partnership on Clean Development and

Climate
See also: Asia Pacific Partnership on Clean Development and Climate
The Asia Pacific Partnership on Clean Development and Climate is an agreement among
seven Asia-Pacific nations: Australia, Canada, China, India, Japan, South Korea, and the
United States. Between them, these seven countries are responsible for more than half of
the world's carbon dioxide emissions.
The partnership had its official launch in January 2006 at a ceremony in Sydney,
Australia. The alliance states that member nations have initiated nearly 100 projects
aimed at clean energy capacity building and market formation since then[citation needed].
Building on these activities, long-term projects are scheduled to deploy clean energy and
environment technologies and services. The pact allows those countries to set arbitrary
goals for reducing greenhouse gas emissions individually, without any enforcement
mechanism for these goals.
Supporters of the pact see it as "complementing the Kyoto Protocol" whilst being more
flexible. Critics have said the pact will be ineffective without any enforcement measures
and is a means to undermine the negotiations leading to the Protocol scheduled to replace
the current Kyoto Protocol (negotiations started in Montreal in December 2005). U.S.
Senator John McCain said the partnership "[amounted] to nothing more than a nice little
public relations ploy,"[104] while the Economist described the partnership as "patent fig-
leaf for the refusal of America and Australia to ratify Kyoto".[105]
[edit] See also
Glossary
Additionality: According to the Kyoto Protocol, gas emission reductions generated by
Clean Development Mechanism and Joint Implementation project activities must be
additional to those that otherwise would occur. Additionality is established when there is
a positive difference between the emissions that occur in the baseline scenario, and the
emissions that occur in the proposed project.
Afforestation: The process of establishing and growing forests on bare or cultivated

land, which has not been forested in recent history.
Assigned Amount: The quantity of greenhouse gases that an Annex I country can release
in accordance with the Kyoto Protocol, during the first commitment period of that
protocol (2008-12).
Baseline: The emission of greenhouse gases that would occur without the contemplated
policy intervention or project activity.
Biomass Fuel: Combustible fuel composed of a biological material, for example, wood
or wood by-products, rice husks, or cow dung.
Carbon Asset: The potential of greenhouse gas emission reductions that a project is able
to generate and sell.
CFU: The World Banks Carbon Finance Unit.
Carbon Finance: Resources provided to projects generating (or expected to generate)

greenhouse gas (or carbon) emission reductions in the form of the purchase of such
emission reductions.
Carbon Dioxide Equivalent (CO2e): The universal unit of measurement used to

indicate the global warming potential of each of the six greenhouse gases. Carbon dioxide
a naturally occurring gas that is a byproduct of burning fossil fuels and biomass, land-
use changes, and other industrial processes is the reference gas against which the other
greenhouse gases are measured.
Certified Emission Reductions (CERs): A unit of greenhouse gas emission reductions

issued pursuant to the Clean Development Mechanism of the Kyoto Protocol, and
measured in metric tons of carbon dioxide equivalent.
Clean Development Mechanism (CDM): The mechanism provided by Article 12 of the

Kyoto Protocol, designed to assist developing countries in achieving sustainable
development by permitting industrialized countries to finance projects for reducing
greenhouse gas emission in developing countries and receive credit for doing so.
Conference of Parties (COP): The meeting of parties to the United Nations Framework
Convention on Climate Change.
Emission Reductions (ERs): The measurable reduction of release of greenhouse gases

into the atmosphere from a specified activity or over a specified area, and a specified
period of time.
Emission Reductions Purchase Agreement (ERPA): Agreement which governs the

purchase and sale of emission reductions.
Emission Reduction Units (ERUs): A unit of emission reductions issued pursuant to
Joint Implementation. This unit is equal to one metric ton of carbon dioxide equivalent.
Fund Management Committee (FMC): PCF Committee comprising five members,

consisting of the Fund Manager and four other members of the management of the
International Bank on Reconstruction and Development (IBRD) selected by the President
of the IBRD. The Fund Management Committee is responsible for overseeing the
operations of the Fund.
Fund Management Unit (FMU): Unit headed by the Fund Manager and responsible for
the day-to-day operations of the Fund.
Greenhouse gases (GHGs): These are the gases released by human activity that are
responsible for climate change and global warming. The six gases listed in Annex A of
the Kyoto Protocol are carbon dioxide (CO2), methane (CH4), and nitrous oxide (N20),
as well as hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride
(SF6).
High quality emission reductions: Emission reductions of a sufficient quality so that, in

the opinion of the Trustee, at the time a project is selected and designed, there will be a
strong likelihood, to the extent it can be assessed, that PCF Participants may be able to
apply their share of emission reductions for the purpose of satisfying the requirements of
the UNFCCC, relevant international agreements, or applicable national legislation.
Host Country: The country where an emission reduction project is physically located.
Internal rate of return: The annual return that would make the present value of future
cash flows from an investment (including its residual market value) equal the current
market price of the investment. In other words, the discount rate at which an investment
has zero net present value.
Joint Implementation (JI): Mechanism provided by Article 6 of the Kyoto Protocol,
whereby a country included in Annex I of the UNFCCC and the Kyoto Protocol may
acquire Emission Reduction Units when it helps to finance projects that reduce net
emissions in another industrialized country (including countries with economies in
transition).
Kyoto Protocol: Adopted at the Third Conference of the Parties to the United Nations
Convention on Climate Change held in Kyoto, Japan in December 1997, the Kyoto
Protocol commits industrialized country signatories to reduce their greenhouse gas (or
carbon) emissions by an average of 5.2% compared with 1990 emissions, in the period
2008-2012.
Millennium Development Goals (MDGs): Commit the international community to an

expanded vision of development, one that vigorously promotes human development as
the key to sustaining social and economic progress in all countries, and recognizes the
importance of creating a global partnership for development. The goals have been
commonly accepted as a framework for measuring development progress.
Monitoring Plan (MP): A set of requirements for monitoring and verification of

emission reductions achieved by a project.
Operational Entity (OE): An independent entity, accredited by the CDM Executive

Board, which validates CDM project activities, and verifies and certifies emission
reductions generated by such projects.
Project-Based Emission Reductions: Emission reductions that occur from projects

pursuant to JI or CDM (as opposed to emissions trading or transfer of assigned amount
units under Article 17 of the Kyoto Protocol).
Project Concept Note (PCN): A brief description of a project prepared by the project
proponent entity or intermediary that is to be presented for consideration by the PCFs
Fund Management Committee and the Participants Committee.
Project Design Document (PDD): A projectspecific document required under the CDM
rules which will enable the Operational Entity to determine whether the project (i) has
been approved by the parties involved in a project, (ii) would result in reductions of
greenhouse gas emissions that are additional, (iii) has an appropriate baseline and
monitoring plan.
Project Idea Note (PIN): A note prepared by a project proponent regarding a project
proposed for PCF. The Project Idea Note is set forth in a format provided by the PCF and
available on its website www.prototypecarbonfund.org.
Reforestation: This process increases the capacity of the land to sequester carbon by
replanting forest biomass in areas where forests have been previously harvested.
Registration: The formal acceptance by the CDM Executive Board of a validated project
as a CDM project activity.
Sequestration: Sequestration refers to capture of carbon dioxide in a manner that

prevents it from being released into the atmosphere for a specified period of time.
United Nations Framework Convention on Climate Change (UNFCCC): The

international legal framework adopted in June 1992 at the Rio Earth Summit to address
climate change. It commits the Parties to the UNFCCC to stabilize human induced
greenhouse gas emissions at levels that would prevent dangerous manmade interference
with the climate system.
Validation: The assessment of a projects Project Design Document, which describes its
design, including its baseline and monitoring plan, by an independent third party, before
the implementation of the project against the requirements of the CDM.
Verified Emission Reductions (VERs): A unit of greenhouse gas emission reductions

that has been verified by an independent auditor, but that has not yet undergone the
procedures and may not yet have met the requirements for verification, certification and
issuance of CERs (in the case of the CDM) or ERUs (in the case of JI) under the Kyoto
Protocol. Buyers of VERs assume all carbon-specific policy and regulatory risks (i.e. the
risk that the VERs are not ultimately registered as CERs or ERUs). Buyers therefore tend
to pay a discounted price for VERs, which takes the inherent regulatory risks into
account.
Verification Report: A report prepared by an Operational Entity, or by another

independent third party, pursuant to a Verification, which reports the findings of the
Verification process, including the amount of reductions in emission of greenhouse gases
that have been found to have been generated.

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Environmental finance

From Wikipedia, the free encyclopedia

Burning of fossil fuels is a major source of industrial greenhouse gas emissions,

The mechanism was formalized in the Kyoto Protocol, an international agreement

[edit] Kyoto's 'Flexible mechanisms'

A credit can be an emissions allowance which was originally allocated or auctioned by

These carbon projects can be created by a national government or by an operator within

[edit] Emission markets

Managing emissions is one of the fastest-growing segments in financial services in the

[edit] Setting a market price for carbon

William Nordhaus, 2008. A Question of Balance - Weighing the Options on Global

[edit] How buying carbon credits can reduce emissions

[edit] Credits versus taxes

By treating emissions as a market commodity it becomes easier for business to

The advantages of a carbon tax are:

possibly less complex, expensive, and time-consuming to implementat. This

[edit] Creating Real Carbon Credits

[edit] Additionality and Its Importance

The Kyoto mechanism is the only internationally-agreed mechanism for regulating

Establishing a meaningful offset project is complex: voluntary offsetting activities

(Redirected from Carbon Finance)

1 Joint Implementation and Clean Development Mechanism

[edit] Joint Implementation and Clean Development

Clean Development Mechanism (CDM), is recognised through the Kyoto Protocol,

[edit] Market value

Volume (millions metric tonnes, MtCO2)

Dollars (millions of USD)

[edit] World Bank

1 Reasons for carbon project development

o 7.1 In the news

[edit] Reasons for carbon project development

Carbon projects are developed for reasons of voluntary environmental stewardship, as

[edit] Kyoto Protocol

[edit] United States

[edit] Project selection

(Redirected from Emission trading)

Emissions trading (or emission trading) is an administrative approach used to control

o 11.2 Carbon trading

1. Gestation: Theoretical articulation of the instrument (by Coase[14], Crocker[15],

[edit] Cap and trade versus baseline and credit

[edit] The economics of international emissions trading

It is possible for a country to reduce emissions using a Command-Control approach, such

Example MACs for two different countries

[edit] Applying the economic theory

A Lagrange framework is commonly used to determine the least cost of achieving an

[edit] Prices versus quantities, and the safety valve

An emission cap and permit trading system is a quantity instrument because it

[edit] Trading systems

[edit] Kyoto Protocol

[edit] Garnaut Draft Report

Australia's Commonwealth, State and Territory Governments commissioned the Garnaut

[edit] European Union

Main article: European Union Emission Trading Scheme

[edit] New Zealand

See also: Climate change in New Zealand

[edit] North America

This article may not provide balanced geographical coverage on

[edit] Renewable energy certificates

[edit] The carbon market

[edit] Market trend

[edit] Business reaction

23 multinational corporations came together in the G8 Climate Change Roundtable, a

In some industrial processes emissions can be physically measured by inserting sensors