The Kyoto Protocol calls for major industrial countries to
reduce their greenhouse gas (GHG) emissions by varying amounts below 1990 emissions levels by 2012. The European Union is supposed to reduce 8% below 1990 levels, Canada 6% and Japan 6%. With Russia's ratification, the Kyoto Protocol came into force on February 16, 2005. As part of Kyoto, countries are allowed to buy emission credits - generated by GHG-reducing projects - in other countries. The treaty has therefore created what is expected to be a multi-billion dollar emissions trading market. Perhaps the most developed market is in the European Union, which has set legally binding limits on GHG emissions for the power sector and large industries. Large European emitters of CO2 will be able to meet their targets three ways: 1) reduce their GHG output; 2) buy allowances from other EU firms that are below their targets (emissions trading) or 3) buy emissions credits from the international market, particularly through the CDM. EU emitters that fail to meet their limits will have a penalty of 40 euros/tonne of CO2 between 2004-2008 and 100 euros/tonne between 2008 and 2012, the end of the first Kyoto period.
For businesses that implement projects that reduce CO2 and other greenhouse gas emissions, this is a major market opportunity. Why? Because for many EU factories and power plants, it will be cheaper to buy credits on the emerging carbon market than to reduce their own emissions for what may be relatively efficient operations.