The Compliance Market
When we use the term “compliance markets” in regard to carbon emissions trading schemes and projects, we are referring to all activities promoted through and governed by the United Nations Framework Convention on Climate Change (UNFCCC(external link)).
The adoption of this Framework in 1992 at the Rio conference was a major step forward in tackling the problem of global warming. It was not until 5 years later that the Kyoto Protocol was adopted at the third Conference of the Parties to the UNFCCC (COP 3) in Kyoto, Japan, on 11 December 1997.
The Protocol shares the objective and institutions of the Convention. The major distinction between the convention and the Kyoto Protocol is that while the Convention encouraged developed countries to stabilize GHG emissions, the Protocol commits them to do so.
The Kyoto Protocol allows for three main formal interrelated mechanisms for reducing GHGs and that consequently mitigate climate change, that signatory governments are bound to implement.
- The Clean Development Mechanism (CDM) encourages countries to promote projects, predominantly in the energy and natural resources sectors, that reduce GHG emissions thereby qualifying for Certified Emission Reduction (CER) credits that can be sold to the global carbon market.
- The Joint Initiative obligates industrialised countries to purchase Emission Reduction Units (ERUs) from developing countries to offset their own industrial emissions (originating from e.g. power stations and primary production).
- Finally the Emissions Trading Initiative ties these two schemes together by creating and monitoring a global carbon market through which the credits produced through one can be purchased under the other. Countries or groups of countries (such as the European Union) have developed individual carbon trading schemes to comply with and support these mechanisms.
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