Emissions trading programs as a means of achieving targets under the Kyoto Protocol
The global problem of climate change is becoming increasingly apparent as populations and economies grow worldwide. The build-up of greenhouse gases (GHGs) in the atmosphere is cited as a prominent cause of climate change. There is a correlation between elevated concentrations of GHGs in the atmosphere, especially carbon dioxide (CO2), and global warming, which leads to extreme weather events such as droughts, floods, and melting of polar ice caps.
There is an international recognition of the immediate need to reduce GHGs and remedy the problem of global warming. The Kyoto Protocol was established in December 1997 as an agreement between over 160 countries to set targets for the reduction of GHGs, and determined available options to achieve them. The Protocol includes three Kyoto Mechanisms, which are three market-based instruments that enable nations to but or earn credits on an international scale. These mechanisms are the Clean Development Mechanism, Joint Implementation, and International Emissions Trading (IET). Developed countries that have accepted a Kyoto target throughout the world are developing emissions trading programs in order to achieve these targets in a cost-effective manner.
In emissions trading, firms or organizations can buy or sell permits for emissions, or credits for reductions of emissions, of particular pollutants. Emissions trading requires that many buyers and sellers congregate to trade the commodities of emissions allowances or emissions reduction credits. International Emissions Trading is considered to be a significant method of minimizing the overall costs involved in the reduction of GHGs.
Upon commencement of an emissions trading program, parties are allocated a certain amount of emissions, and governments may either auction these permits or provide them for free. The total sum of permits available corresponds directly to the nations emissions reduction targets. Parties that are successful in reducing emissions below permitted levels may sell unused permits to parties that have not reduced emissions below permitted levels. It may be more cost effective in some cases for parties to initially buy some unused permits rather than investing in new
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