Since the inception of the Industrial Revolution in the late eighteenth century, our society has undergone drastic changes. The advent of manufacturing industries, construction business and transportation has been emblematic to the human development. These changes would not have been possible without the fossil fuels. The countries that identified the true potential of the fossil fuels and developed their ability to harness energy from them, climbed up the ladder of economic development.
We are now beginning to identify the true repercussions of exploitation of the natural resources and the imbalance it creates in our fragile ecosystem. The recent comprehensive report published by Intergovernmental Panel on Climate Change (IPCC) points out the impact of climate change and the cost of a stymied environmental policy.
Some of the poignant consequences that are elucidated in the report are:
Kyoto Protocol
Kyoto Protocol is a set of binding obligations set up by the United Nations Framework Convention on Climate Change (UNFCCC) upon industrialized nations to curb their greenhouse gas (GHG) emissions. UNFCCC recognizes that the current level of GHG is primarily due to the industrial activities that the now-developed countries undertook for their development in the past couple of centuries. The developed countries bear the heavier burden under the principle of common but differentiated responsibilities.
The Kyoto Protocol was adopted in Kyoto, Japan, on 11 December 1997 and entered into force on 16 February 2005. It had set two commitment periods for its member countries:
Objective
The objective of Kyoto Protocol and UNFCCC is to stabilize greenhouse gas concentrations at a level that would prevent dangerous anthropogenic interference with the climate system. It states that such a level should be achieved within a time-frame sufficient to allow ecosystems to adapt naturally to climate change, to ensure that food production is not threatened, and to enable economic development to proceed in a sustainable manner.
The objective of the first commitment period of the Kyoto Protocol was to reduce the net global emissions to 5% below 1990 level by 2012. The bar was raised to 18% for the second commitment period.
Implementation
Each party is allocated a certain amount of allowances based on their historical emissions. An allowance gives the party the right to emit 1 ton of CO2 or equivalent GHG. The amount of allocated allowance is termed as Assigned Amount Units (AAU).
There are few mechanisms which allow the party to increase its inventory of allowances:
Clean Development Mechanism
CDM allows a participating country to earn an extra allowance (called CER) by undertaking a project in a developing country which helps in reducing their CO2 emission by 1 ton.
Joint Implementation
JI allows a participating country to earn an extra allowance (called ERU) by undertaking a project in another participating country which helps in reducing their CO2 emission by 1 ton.
International Emission Trading
In addition to the above mechanisms, one can buy allowances in the open market. An open market is an efficient mechanism to determine the true price of an allowance (a ton of CO2 emitted). Emission Trading allows a party to sell excess allowance to another party which could not curb its emission.
To prevent the parties from overselling their AAU and ending up falling short in meeting their own emissions targets, each party is required to maintain a reserve of allowances in its national registry. This reserve, known as the commitment period reserve, should not drop below 90% of the party's assigned amount.
At the end of the year, there is a true up where the party has to surrender the allowances equivalent to its annual emission. A penalty is imposed if the party fails to possess sufficient number of allowances.
Depending upon the carbon regime, an excess or shortage of allowances can be dealt in the following ways:
Monitoring and Reporting
A system has been set in place for precise recording and reporting of emission data. The adherence of the parties to their commitment is also monitored.
Greenhouse Gases Covered
EU-Emission Trading Scheme (ETS)
Phase 1(2005 – 2007) & Phase 2 (2008 – 2012)
Phase 1 was a pilot phase that helped EU in setting up the necessary infrastructure to build a new market in Emission Trading also known as Cap and Trade Market. Phase 2 was aligned to the Kyoto Protocol's first commitment period.
The following industries were covered under this scheme:
These industries emit around 45% of the net EU emissions. National Allocation Plan (NAP) was deployed where each member within the EU were allocated allowances based on their historic emission. The member state had their discretion on allocating the allowances to the industries.
The allocation to the industries could be done in either of the two ways:
The players were not allowed to bank their excess allowances at the end of the first phase. This led everyone to the selling spree, resulting in the nosedive of the price to a few cents (from a peak of 30 Euros).
Phase 3 (2013 – 2020)
There were many lessons learnt from the previous phases which lead to major changes in the third phase. Some of the key features are listed below:
Illustration
Participants
The Impact of Kyoto Protocol
The above graphs depict the trend in global CO2 emissions and EU CO2 emissions. We see a sharp decline in EU emissions after 2005, since the implementation of EU-ETS; albeit there is a decline in EU energy consumption as well which can be attributed to the global recession.
From the global perspective, we do not see any downward trend in the emission pattern. The primary reason for this monotonically increasing curve is the rapid expansion of the developing economies – China and India which largely curtails any reduction elsewhere.
This demolishes the basic foundation of the Kyoto Protocol and the Emission Trading Scheme. However this should not be looked upon as a failure. Kyoto Protocol led the industries to factor in the cost of emitting GHG in their balance sheets for the first time. It motivated them to invest in clean technologies sparking innovation in the fields of renewables and CCS. This should be taken as a call for a collaborative international effort with stringent measures to cut down the GHG emissions. The longer we remain irresolute on our actions, higher the cost of mitigating the risk gets.
The clock is ticking and it's too late to be a pessimist.
Bibliography
We are now beginning to identify the true repercussions of exploitation of the natural resources and the imbalance it creates in our fragile ecosystem. The recent comprehensive report published by Intergovernmental Panel on Climate Change (IPCC) points out the impact of climate change and the cost of a stymied environmental policy.
Some of the poignant consequences that are elucidated in the report are:
- The requirement to build necessary infrastructure to adapt ourselves to extreme climate
- loss of land due to increased sea level
- decline in marine resources
- vagaries in weather pattern leading to tumultuous crop output
Kyoto Protocol
 |
| Kyoto had been the capital of Japan from 1180-1868 |
Kyoto Protocol is a set of binding obligations set up by the United Nations Framework Convention on Climate Change (UNFCCC) upon industrialized nations to curb their greenhouse gas (GHG) emissions. UNFCCC recognizes that the current level of GHG is primarily due to the industrial activities that the now-developed countries undertook for their development in the past couple of centuries. The developed countries bear the heavier burden under the principle of common but differentiated responsibilities.
The Kyoto Protocol was adopted in Kyoto, Japan, on 11 December 1997 and entered into force on 16 February 2005. It had set two commitment periods for its member countries:
- First Commitment Period – 1st January 2008 to 31st December 2012
- Second Commitment Period – 1st January 2013 to 31st December 2020
Objective
The objective of Kyoto Protocol and UNFCCC is to stabilize greenhouse gas concentrations at a level that would prevent dangerous anthropogenic interference with the climate system. It states that such a level should be achieved within a time-frame sufficient to allow ecosystems to adapt naturally to climate change, to ensure that food production is not threatened, and to enable economic development to proceed in a sustainable manner.
The objective of the first commitment period of the Kyoto Protocol was to reduce the net global emissions to 5% below 1990 level by 2012. The bar was raised to 18% for the second commitment period.
Implementation
Each party is allocated a certain amount of allowances based on their historical emissions. An allowance gives the party the right to emit 1 ton of CO2 or equivalent GHG. The amount of allocated allowance is termed as Assigned Amount Units (AAU).
There are few mechanisms which allow the party to increase its inventory of allowances:
- Removal Unit (RMU) on the basis of land use, land-use change and forestry (LULUCF) activities such as reforestation
- Emission Reduction Unit (ERU) generated by a Joint Implementation (JI) project
- Certified Emission Reduction (CER) generated from a Clean Development Mechanism (CDM) project
Clean Development Mechanism
CDM allows a participating country to earn an extra allowance (called CER) by undertaking a project in a developing country which helps in reducing their CO2 emission by 1 ton.
Joint Implementation
JI allows a participating country to earn an extra allowance (called ERU) by undertaking a project in another participating country which helps in reducing their CO2 emission by 1 ton.
International Emission Trading
In addition to the above mechanisms, one can buy allowances in the open market. An open market is an efficient mechanism to determine the true price of an allowance (a ton of CO2 emitted). Emission Trading allows a party to sell excess allowance to another party which could not curb its emission.
To prevent the parties from overselling their AAU and ending up falling short in meeting their own emissions targets, each party is required to maintain a reserve of allowances in its national registry. This reserve, known as the commitment period reserve, should not drop below 90% of the party's assigned amount.
At the end of the year, there is a true up where the party has to surrender the allowances equivalent to its annual emission. A penalty is imposed if the party fails to possess sufficient number of allowances.
Depending upon the carbon regime, an excess or shortage of allowances can be dealt in the following ways:
- The excess allowance could be banked to the next period
- The shortage of allowance could be covered by borrowing it from the next period
Monitoring and Reporting
A system has been set in place for precise recording and reporting of emission data. The adherence of the parties to their commitment is also monitored.
Greenhouse Gases Covered
- Carbon Dioxide (CO2)
- Methane (CH4)
- Nitrous Oxide (N2O)
- Hydrofluorocarbons (HFC)
- Perfluorocarbons (PFC)
- Sulphur Hexafluoride (SF6)
- Nitrogen Trifluoride (NF3)
EU-Emission Trading Scheme (ETS)
Phase 1(2005 – 2007) & Phase 2 (2008 – 2012)
Phase 1 was a pilot phase that helped EU in setting up the necessary infrastructure to build a new market in Emission Trading also known as Cap and Trade Market. Phase 2 was aligned to the Kyoto Protocol's first commitment period.
The following industries were covered under this scheme:
- Power Plants & Utilities
- Oil & Gas
- Steel and Heavy Industries
- Glass & Cement
- Paper & Pulp
These industries emit around 45% of the net EU emissions. National Allocation Plan (NAP) was deployed where each member within the EU were allocated allowances based on their historic emission. The member state had their discretion on allocating the allowances to the industries.
The allocation to the industries could be done in either of the two ways:
- Free Allocation – The industry would receive the allowances without having to pay for it. The argument against this method is that it could lead to windfall profits.
- Auction – The industry would have to bid to earn the allowances. This could lead to a hefty increase in the cost to the company, the consequence of which has to be borne by the consumers. The company might lose its competiveness operating in EU’s carbon regime and thereby choose to shift to a country without such mandates. Due to this fear of Carbon Leakage, EU decided to limit the amount of allowances to be allocated by auction to 5% in the first phase and 10% in the second.
The players were not allowed to bank their excess allowances at the end of the first phase. This led everyone to the selling spree, resulting in the nosedive of the price to a few cents (from a peak of 30 Euros).
Phase 3 (2013 – 2020)
There were many lessons learnt from the previous phases which lead to major changes in the third phase. Some of the key features are listed below:
- National Allocation Plan (NAP) was replaced by an EU wide Harmonized Carbon Regime
- Full auction for allocating allowances to the power sector
- 50% of the fund from auctioning to be used to fund Carbon Capture and Storage (CCS) projects
- Free allocation of allowances for the new entrants (entrants in the power sector do not qualify)
- A maximum of 5% of the total allowances could be used for New Entrant Reserve
- A maximum of 50% of the required reduction in GHG emissions can be attained using CDM/JI mechanisms
- Aviation was added to the list of industries to be covered under the scheme. Allowances equivalent to 97% of 2004-2006 average emission was allocated, 85% of which were allocated freely
Illustration
Participants
The Impact of Kyoto Protocol
The above graphs depict the trend in global CO2 emissions and EU CO2 emissions. We see a sharp decline in EU emissions after 2005, since the implementation of EU-ETS; albeit there is a decline in EU energy consumption as well which can be attributed to the global recession.
From the global perspective, we do not see any downward trend in the emission pattern. The primary reason for this monotonically increasing curve is the rapid expansion of the developing economies – China and India which largely curtails any reduction elsewhere.
This demolishes the basic foundation of the Kyoto Protocol and the Emission Trading Scheme. However this should not be looked upon as a failure. Kyoto Protocol led the industries to factor in the cost of emitting GHG in their balance sheets for the first time. It motivated them to invest in clean technologies sparking innovation in the fields of renewables and CCS. This should be taken as a call for a collaborative international effort with stringent measures to cut down the GHG emissions. The longer we remain irresolute on our actions, higher the cost of mitigating the risk gets.
The clock is ticking and it's too late to be a pessimist.
Bibliography
- US Senate
- GOV.UK
- Intercontinental Exchange (ICE)
- The Guardian
- Scientific American
- Excel Rawdata
- EU Member States
- UNFCCC - Doha Amendment