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Offset Mechanisms under the Kyoto Protocol
The Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC) established a cap-and-trade system that imposes national caps on the greenhouse gas emissions of high income countries that ratified the Protocol (called Annex B countries). Each participating country is assigned an emissions target and the corresponding number of allowances – called Assigned Amount Units (AAUs).
Under the treaty, a group of industrialized countries and countries with economies in transition (EIT) had legally binding commitments to reduce their overall GHG emissions to 5% below 1990 levels during the period 2008–2012. Each country within the group also has a separate target that ranges between an 8% reduction to a 10% cap on increases in emissions.
Countries must meet their targets within a designated period of time by:
- Reducing their own emissions; and/or
- Trading emissions allowances with countries that have a surplus of allowances; and/or
- Meeting their targets by purchasing carbon offset credits.
This ensures that the overall costs of reducing emissions are kept as low as possible. To generate offset credits, the Kyoto Protocol established project-based offset mechanisms: the Clean Development Mechanism (CDM) and Joint Implementation (JI).
JI is the instrument for offset projects taking place within countries with binding emission commitments under the Kyoto Protocol (most high-income countries), while the CDM is for offset projects in countries without such commitments (most low or middle income countries). In addition to economic efficiency, the CDM has the objective of promoting sustainable development and technology transfer in host countries.