The first commitment period under the Kyoto Protocol is 2008-2012, and requires Canada to reduce emissions by an average of 260 Mt CO2 eq for each of those years. This means that Canada has only one year to begin bringing about GHG emission cuts that are about one-third less than forecasted levels over this period.
Cutting emissions by this amount in such a compressed period of time is unprecedented in the absence of a dramatic decline in economic output (for example, as occurred in several Eastern European countries after the collapse of the USSR).
While Annex 1 Parties to the Kyoto Protocol are expected to take domestic policy measures to meet their commitments, the Protocol provides three "flexibility mechanisms" to lower the overall costs for Annex 1 Parties in achieving their emission reduction targets. The three Kyoto mechanisms are:
Under the terms of the Kyoto Protocol, signatory countries that have not met their first compliance period targets will be required to make up the difference in the second commitment period, plus a penalty of 30%. They must also develop a compliance action plan, and their eligibility to "sell" under emissions trading will be suspended.
Cutting emissions by this amount in such a compressed period of time is unprecedented in the absence of a dramatic decline in economic output (for example, as occurred in several Eastern European countries after the collapse of the USSR).
There are several potential policy options for Canada to meet its Kyoto targets starting in 2008, beginning with significant domestic action to reduce emissions levels. It is likely, however, that an exclusive domestic focus would not be possible to maintain, given the magnitude of adjustment for Canada's economy, at this late date, that will be required to yield the required emissions reductions. Canada also has recourse to the Kyoto mechanisms to achieve compliance, which are intended to provide for lower-cost emissions reductions than achievable domestically; but these come with their own economic and environmental risks and uncertainties.
At this time, project-based credits generated from the CDM (known as CERs) represent the main option for environmentally credible international purchases.4 Under the CDM, various processes are in place to ensure projects generate emissions reductions that are additional to those that would have been achieved without financial support. The issuance of CERs to CDM projects is only made after the use of approved methodologies, third-party certification, and approval by the executive board of the CDM. The growth of the CDM market over the past two years, primarily from European and Japanese investment, as well as support from environmental NGOs, provides further indication that CDM has strong environmental credibility.
There is, however, considerable uncertainty about the volume of project-based credits available for purchase. Based on preliminary information from the UNEP Risoe Centre on Energy, Climate and Sustainable Development, about 85 million CERs and other project-based credits (from Joint Implementation) will potentially be available per year for purchase between 2008 and 2012.5 This equates to less than one-third of Canada's annual reduction target.
An alternative compliance option to purchasing project-based credits would be to purchase AAUs from countries with excess units, such as Russia or Ukraine. Some Annex I countries, including Canada, have expressed a reluctance to purchase these excess AAUs for compliance, as the excess is frequently due to economic collapse or falling production and not for reasons directly related to efforts to curb emissions (so-called "hot air").
Assigned Amount Units (AAUs)
Assigned amount units (AAUs) are emission allowance units granted to each Annex I country according to their respective target level of GHG emissions in the Kyoto agreement.
There is additional uncertainty with respect to Canada's ability to rely heavily on international emissions reductions. For its part, the Kyoto Protocol stipulates that domestic action must constitute a "significant element" of a country's effort to meet its targets.6 There is no specific limit on the share of international credit purchases that can be counted towards any country's individual target, but Kyoto does not envision that countries would rely primarily on international credits to meet their commitments. Overall, the latest projections from the European Environment Agency indicate that for 10 of the countries making up the EU15, about one-third of projected emissions reductions are planned to come from the use of Kyoto's flexibility mechanisms.7
Also uncertain is Japan's level of reliance on international emission reductions. Japan's 2005 Kyoto Achievement Plan indicated that about 13% of its 150 million tonne per year Kyoto gap would be filled through international purchase of credits (about 20 million CERs per year). Japan is already a large buyer of CERs, accounting for about 35% of CERs issued to date.
CoP7 in 2001
At the CoP7 meeting in 2001 (the Marrakesh Accords), the principle of "supplementarity" with respect to the rules for meeting the targets set out in the Kyoto Protocol stated:
"the use of the [Kyoto "flexibility"] mechanisms shall be supplemental to domestic action and ... domestic action shall thus constitute a significant effort made by each party ..."
4 Certified Emission Reductions (CERs) are issued for emission reductions from CDM project activities and are equal to 1 metric tonne of CO2 equivalent. Based on information from the UNEP Risoe Centre on Energy, Climate and Sustainable Development, the number of CERs represents roughly 93% of the total project-based credits forecast to 2012 (credits from Joint Implementation - ERUs - account for only 7%).
5 Credits for which no buyer is currently identified or known to the United Nations.
6 The Marrakesh Accords, Decision 15/CP.7, Article 1.
7 European Environment Agency: Projections of greenhouse gas emissions and removals (CSI 011) - Assessment published February 2007