Kyoto Emissions Trading

Bringing together the Clean Development Mechanism and Joint Implementation was the Kyoto emissions trading system. This was a system in which meeting targets and using the mechanisms involved gave you tradable carbon allowances.

These commodities were generated when countries overshot their targets (AAUs), when they made use of land in an environmental way, such as reforestation (RMUs), through joint implementation projects (ERUs), and through CDM mechanisms (CERs) [1]. This was a kind of cap and trade system.

We’ve talked about ERUs and CERs, but not a lot about RMUs. This is because the market for them and their effects were relatively small [2]. You can find out more about the LULUCF activities that generated them here.

In the long-run, what the Kyoto trading system became infamous for was oversupplying credits – giving away too many allowances on emissions and causing a carbon leakage. This started with the hot-air problem in Ukraine and Russia, but quickly spread to most eastern European countries amongst others [3][4]. For these economies in transition, their targets were set in harder times, so they easily reached them and were given billions of credits as rewards. 

But some even saw this coming in 2001: “Even scenarios with high economic growth and carbon-intensive technologies do not exhaust the surplus before the budget period [for Russia and Ukraine].” [5] The middle scenario in that prediction saw 1 billion tonnes carbon leakage.

It has been very difficult to put a real number on the carbon leakage actually caused by the Kyoto trading system. What we can look at instead is pricing of the carbon credits, which went from $20 a tonne in 2008 to a record low of $0.31 at the end of 2012 [6].

The CDM trade was also trapped in a corner by 2012 [7]. Because the biggest emitters (USA, China, India) didn’t have targets, Europe became the main user of credits, and the system became a big part of the ETS. In came the Euro debt crisis (part of the Great Recession) and a drop in industry output, making the credits abundant and uncalled for.

So, by 2012, the CDM had ‘essentially collapsed.” [8] But the international stage understood what was happening, and were acting on it. The EU adjusted its own markets, but deals at Copenhagen and Doha marked turning points for the emissions trading, and for the Protocol as a whole.

[1] https://unfccc.int/process/the-kyoto-protocol/mechanisms/emissions-trading
[2] https://www.eea.europa.eu/publications/progress-towards-2008-2012-kyoto/download 
[3] https://carbonmarketwatch.org/2012/05/30/ji-and-aau-surplus/
[4] https://link.springer.com/article/10.1007/s10290-019-00350-5
[5] https://link.springer.com/article/10.1023/A:1010768306975
[6] https://en.wikipedia.org/wiki/Certified_Emission_Reduction
[7] https://www.economist.com/finance-and-economics/2012/09/15/complete-disaster-in-the-making[8] https://www.theguardian.com/environment/2012/sep/10/global-carbon-trading-system

Categories Climate Economics/Climate Policy History