Markets which trade reductions in greenhouse gas emissions are now emerging as a result of global concern about climate change. The most prominent international agreement is the United Nations Framework Convention on Climate Change (UNFCCC) which was agreed at a summit in Rio in 1992 and came into effect in 1994. Many countries agreed that climate change was a problem and that action should be taken to reduce emissions of greenhouse gases in order to stabilise the climate and reduce adverse impacts on our planet.
In 1997, the parties to the UNFCCC adopted a protocol at its meeting in Kyoto. This specified that developed countries should undertake a binding commitment to reduce their greenhouse gas emissions to an average of 5.2 % below 1990 levels during the period 2008 to 2012. The Kyoto Protocol entered into force on February 16th 2005.
The protocol specifies a number of mechanisms by which emissions reductions targets may be achieved, including emissions trading and ‘flexible mechanisms’ by which developed world targets may be met by undertaking emissions reduction projects in the developing world (the Clean Development Mechanism and Joint Implementation).
On July 2nd 2003, the European Union reached an agreement on the EU Emissions Trading Directive which set out to implement an emissions trading scheme throughout Europe with effect from 1st January 2005. On July 23rd 2003, the draft EU Linking Directive was published allowing emissions credits arising from the flexible mechanisms of the Kyoto Protocol to be allowed into the EU emissions trading scheme with effect from 2005 for Certified Emissions Reductions and 2008 for Emissions Reductions Units.
A number of other signatories to the Kyoto Protocol are preparing to implement emissions trading schemes, for example Canada and Japan and discussions on a successor to the Kyoto Protocol are underway. Meanwhile, the emerging voluntary markets allow many new participants to explore market mechanisms to counter global warming.