Framing

Carbon Market

The awareness that Climate Changes result from increases in greenhouse gas (GHG) emissions caused by human activities has been the basis for defining policies aimed at GHG emission reductions.

In February 2005 the Kyoto Protocol entered into force, setting GHG emission limits for developed countries. The countries in Annex I became collectively obligated to reduce their emissions during the 2008-2012 period in at least 5% in relation to verified levels in 1990. Specific market mechanisms were established in the Protocol with the aim of enabling the countries to fulfill their emission reduction targets in a cost effective manner:

  • CDM (Clean Development Mechanism, which provides for the creation of CERs),
  • JI (Joint Implementation, which provides for the transfer of ERUs) and
  • ET (Emissions Trading, which provides for the trade of AAUs).

Through the establishment of targets, penalties, and flexible mechanisms a new commodity was created – Carbon.

Side by side with the international carbon market, a European market evolved, including the main industrial companies in a cap-and-trade system of carbon allowances (European Union Emission Trading Scheme).

The Carbon market has been rapidly growing in the last years. From 2005 to 2009, its value has increased more than 20 times, from 8 billion USD to 127 billion USD. It is now clearly acknowledged as an essential part of the response to climate change and a crucial instrument for future climate change mitigation. The participation of the private sector on the carbon market is essential, and studies estimate that, by 2020, 86% of financing for mitigation will have to come from private sector.

With the end of the commitment period of the Kyoto Protocol becoming near, new challenges are presented to these market players as a transition period will eventually come before us.

The scaling up of the project based mechanisms, or even new mechanisms for mitigation and private sector participation will eventually come into place on a post-Kyoto scheme, namely sector-based market mechanisms and ultimately cap-and-trade systems, in advanced developing countries.

We expect that within the mechanisms and framework that may come in the future, the private sector will always have a part in climate change mitigation and will support sustaining low carbon development growth in developed and developing countries.

1UNFCCC Study (2007), Investment and Financial Flows to Address Climate Change