Kyoto Protocol

The Kyoto Protocol is an international agreement designed to reduce the total global level of greenhouse gas (GHG) emissions.

The Kyoto Protocol requires over thirty countries to reduce their GHG emissions. The required reductions constitute a serious economic challenge to these countries. To facilitate the emission reductions, the Kyoto Protocol has created a new commodity – GHG emission reductions, i.e. the absence of these emissions – and the opportunity to buy and sell these reductions.

Why undertake CDM or JI now?

Clean Development Mechanism and Joint Implementation

The Clean Development Mechanism (CDM) and Joint Implementation (JI) are two market-based methods established by the Kyoto Protocol to reduce global greenhouse gas (GHG) emissions and to facilitate economic and technological development. CDM and JI are similar, though not identical:

  • CDM projects take place in developing or newly-industrialised countries (non-Annex I) with no current targets to reduce GHG emissions.
  • JI projects take place in industrialized countries (Annex I) that have committed, through Kyoto, to reduce their GHG emissions.

CDM and JI both provide financial incentives for businesses to invest in GHG reduction projects because these reductions have financial value: they can be sold to parties that have committed to GHG reductions under the Kyoto Protocol. Investment in a CDM or a JI projects is a more economically efficient way for Annex I industries to meet their Kyoto targets.

Annex I parties may finance the carbon emission reduction projects and acquire the resulting "carbon credits", or else they may purchase these "carbon credits" from the carbon market.

CDM and JI projects may include installing new technology in a factory or switching to cleaner fuels such as natural gas or solar energy to reduce greenhouse gas emissions, or capturing and destroying greenhouse gas emissions.

Why undertake CDM or JI now? 

CDM and JI are incentives to implement emission reduction projects now.

To be approved as eligible for CDM or JI projects must meet certain criteria. One of the most important requirements for a CDM or a JI project is additionality. Additionality requires clear evidence that the emission reductions made possible by the project would not have otherwise occurred. Projects qualify for CDM status if:

  • Regulation: the activity to be undertaken/greenhouse gas reduction is not required by law;
  • Financial: There are economic barriers to implementing the project;
  • Institutional: There are technical, institutional or other barriers that make the project difficult to implement.

In the future, the government may develop regulations that will require industries to reduce their emissions or the financial or institutional barriers may be overcome. In these cases, the project would not qualify as "additional" and could not benefit from investment under CDM or JI, nor sell the reduced emissions in the carbon market.