Annex B of the Kyoto Protocol sets out specific targets for certain industrialised countries to reduce or limit their greenhouse gas emissions by reference to their 1990 emissions levels. To allow the countries listed in Annex B to comply with their obligations in the most efficient manner, three flexible mechanisms were developed - the Clean Development Mechanism (CDM), Joint Implementation (JI) and emissions trading.
These allow Parties to trade a proportion of their national emissions to other nations, based on emission units generated by reductions or sequestration of greenhouse gases. Gases are normalised into a single fungible unit according to the global warming potential of each, which is calculated by comparison to a similar volume of carbon dioxide (CO2-e).
The CDM provides for Annex I (developed) Parties to implement project activities that reduce anthropogenic emissions in non-Annex I Parties. The Certified Emission Reductions (CERs) generated by such projects can be used by the Annex I Party to help meet its emissions targets under the Kyoto Protocol. Parties can authorise legal entities to take part in project activities.
Under JI, one Annex I Party may implement an emission-reducing project or a project that enhances removals by sinks in another Annex I Party and by doing so generate Emission Reduction Units (ERUs) that will count towards meeting its own Kyoto target. Parties can also authorise legal entities to take part in JI projects.
International emissions trading under the Kyoto Protocol provides a framework for trading CERs, ERUs, Assigned Amount Units (AAUs) and Removal Units (RMUs) between Annex I Parties. International emissions trading under the Kyoto Protocol can be linked to regional or domestic trading schemes, the most notable of which is currently the European Union Emissions Trading Scheme (EU ETS).
The diagram below outlines the three flexible mechanisms of the Kyoto Protocol.