Finally, the Kyoto Protocol looks set to become operational. Seven years after it was agreed in Japan and three years after rejection by the USA, the Russian government has approved ratification. Ninety days after that is received by the UN, it will come into force.

So, what does ratification actually mean for the
international community? It will bring into force international commitments by Annex 1 Kyoto signatories, such as the UK, to substantially reduce greenhouse gas emissions by 2012.

International mechanisms

Ratification will also allow mechanisms such as Joint Implementation and the Clean Development Mechanism to become operational. These mechanisms are intended to help countries meet their commitments in the most efficient manner by encouraging private investment in GHG reduction projects in least cost/maximum benefit locations.

These measures should increase the rate at which carbon reduction projects are commissioned, especially those involving cross-border investment. The CDM will also encourage private investment in projects in poor countries.

The CDM requires that projects demonstrate that they would not have taken place without it, and that they contribute to social and environmental as well as economic development. In this respect, the World Bank’s Prototype Carbon Fund has taken a pioneering role, using funds contributed by several international companies as capital for GHG reduction projects in developing economies and providing carbon credits that will become tradable in return.

Russia’s commitment

Russia, with 17% of world GHG emissions, is the largest emitter that will take on a binding target under Kyoto, and is potentially the dominant seller of allowances and credits in the global carbon market. Only the USA and China emit more, and unfortunately neither has ratified.

Russia’s target is to stabilise its emissions at 1990 levels. However, Russia’s industry has collapsed and is being rebuilt. The consequence of this is that its CO2 emissions are unlikely to exceed 1990 levels until around 2016. Even with president Putin’s ambition to double GDP within ten years, the target looks relatively easy to achieve.

Theoretically, Russia could sell the difference between current and 1990 level emissions into the global emissions market. However this amount far exceeds demand from the principal emissions purchasers: the EU, Japan and Canada.

The European scheme

The EU emissions trading scheme is the central plank for European countries to achieve targets and London is competing to become a leading trading centre. Since the Russian decision was announced, the amount of carbon traded in Europe has almost tripled.

Is this a sign of things to come? To achieve long-term success, the USA must be involved. With a 36% share of greenhouse gas emissions, the US is fundamentally against any Kyoto-style agreement that excludes capping developing countries. China and India have huge coal resources that are likely to be used to fuel their energy requirements. Both are wary of initiatives that might limit growth.

The solution most likely to satisfy the USA and developing nations is to link targets to GDP growth – to establish relative targets as opposed to limiting absolute emissions.

However, it may still prove difficult to persuade the US to switch to an absolute target. In the US, there is greater support for technological solutions and carbon sequestration. This is also an initiative strongly supported by Australia. Despite not signing up to the protocol, Australia plans to meet its Kyoto target.

Kyoto offers an unprecedented level of challenges for many companies, as well as some difficult legislative and regulatory targets. However, it also offers opportunities.

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