by Dwayne Strocen

Created on: April 20, 2010   Last Updated: April 29, 2010

The Kyoto Protocol of 1997 was signed by 38 signatory countries to address the issues of greenhouse gasses and resulting climate change issues.  The following article will provide an understanding about trading greenhouse gas emissions.

The Kyoto Protocol is a UN-led international agreement reached in 1997 in Kyoto Japan to address the problems of climate change and the reduction greenhouse gas emissions. The Kyoto Protocol went into force on February 2005.

Signatory countries are committed to moving away from fossil fuel energy sources - oil, gas and coal, to renewable sources of energy such as hydro, wind and solar power, and to less environmentally harmful ways of burning fossil fuels.

Greenhouse gases such as carbon dioxide, methane and nitrous oxide are mainly generated by burning fossil fuels. Higher levels of greenhouse gas emissions cause global warming and climate change.

The Protocol commits 38 industrialized countries to cut greenhouse gas emissions by 2008-2012 to overall levels that are 5.2 percent below 1990 levels. Targets for greenhouse gas emissions reduction were established for each industrialized country. Developing countries including China and India were asked to set voluntary targets for greenhouse gas emissions.

The Canadian target for Kyoto is to reduce by 2012, greenhouse gas emissions by six percent below their 1990. The United States did not ratify the Kyoto Protocol, and in February 2002 introduced the Clean Skies and Global Climate Change initiatives, in which targets for reduction in greenhouse gas emissions are linked directly to GDP and the size of the U.S. economy.

Trading of carbon emissions is linked to a program called Cap-and-Trade.  Understanding this concept is necessary to begin effective trading. A central authority (usually a government or international body) sets a limit or cap on the amount of emissions discharged into the atmosphere.

Companies that exceed the cap may be subject to fine or regulatory sanction. Therefore, those who find they cannot meet the conditions of the cap will look to buy credits from those who pollute less.

Many older established companies are forced to spend considerable sums of money modernizing plants. In many instances this takes time, usually years to achieve. In contrast to new generation technologies which are not faced with up-grading facilities to comply with 1990 emission standards.

Trading emission credits is a way for low emission companies such as wind farms to sell credits

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