Flexible Mechanisms
A key feature of the Kyoto Protocol is the creation of the flexible mechanisms, namely the Clean Development Mechanism (CDM), Joint implementation (JI), and International Emissions Trading (IET). Parties from Annex 1 countries which have ratified the Kyoto Protocol, regardless of emissions reductions commitments, are permitted to utilise one or more of these mechanisms.
Due to the mix of industrial activities and the levels of development across countries, developing nations tend to offer more opportunities for low-cost abatement. Under a carbon-constrained future, the CDM concept ideally provides a "soft landing" for industrialised countries by slowing their required rate of abatement, and spurs developing nations onto a more sustainable growth path.
Both JI and CDM involve the development of projects that reduce levels of emissions compared to what they would have been in a 'business-as-usual' scenario (known as the 'baseline'). These projects range from energy efficiency and fuel switches in existing power plants, to the construction of small renewable plants or the capture of methane from landfill sites to generate power. A project that reduces its emissions to below its 'baseline' can claim credits for every tonne of Carbon Dioxide equivalent (tCO2e) it doesn't emit. These credits can then be sold to companies or Governments to meet their own targets, enabling an economic interchange and transfer of technology to the Seller and host country, and a more cost effective method of meeting targets for the Buyer. Many countries have established government bodies to promote and help with the development of CDM and JI projects. Most of these have in turn produced guidelines for designing and structuring projects, detailing the processes and permissions required. This is covered in more detail under the Clean Development Mechanism section and the Joint Implementation sections.
Projects that reduce emissions can be developed in a number of fields, the most common of which include Renewable Energy, Landfill gas capture and electricity generation, HFC-23 destruction, N2O reduction, fuel switching, energy efficiency, methane capture and electricity generation from agriculture and waste.
Other sectors are currently facing initial implementation challenges, for example the scientific debate on carbon storage impermanence for forestry, or the lack of clear methodologies for transport, or carbon capture and storage. These are important sectors which are anticipated to contribute much to the carbon trading industry.
Supplementarity
While the Kyoto Protocol has created innovative mechanisms to promote carbon trading, its key message remains effective domestic reductions by industralised countries. This is seen by its clause on supplementarity, which states that domestic action must constitute the "main and significant element" of efforts to reach emissions targets. This not only provides an economic incentive for low-carbon technology innovation as the cost of abatement is much higher in industralised countries, it also sends a strong international message that the task of achieving a stable climate is a shared, global responsibility.
The EU ETS allows the use of Kyoto credits via the Linking Directive, and has also adopted this principle of supplementarity.
Additionality
One of the principle criteria required for a CDM project is that it must result in "reductions in emissions that are additional to any that would occur in the absence of the certified project activity". This is controversial, as a stringent interpretation leads to high transaction costs due to evidence collection, and correspondingly low project uptake. Conversely, a relaxed interpretation opens the CDM to fraud, leading to more low-quality projects and diluted mitigation impact.
The CDM Executive Board proposes the "consolidated additionality tool" as a guide, the crux of which is the barrier analysis to show how the CDM aids in overcoming investment, technological and common-practice barriers to implementation. A robust additionality test has several advantages, including minimising free-riders – parties which benefit without contributing to real emissions reductions, and maintaining the environmental integrity of the CDM.