Compliance Markets

Related Files
  • Compliance Markets and Traditional Fire Management 

    As explored further in the Australia section of this Toolkit, Australia led the world in approving methodologies for savanna burning that can be used by Australian Indigenous communities, among other landholders, to generate Kyoto compliant Australian Carbon Credit Units (ACCUs). Outside the Australian example, the potential for compliance markets to support traditional fire management around the world has not yet been fully realised, although the demand for offsets generated through savanna fire management is clear.

    Background to Compliance Markets 

    Compliance markets include the market created pursuant to the Kyoto Protocol, and various domestic schemes.

    • Kyoto Protocol

    In 1997, more than 170 countries adopted the Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC). The Kyoto Protocol set legally binding targets for 37 industrialised countries to limit or reduce overall GHG emissions by at least 5% below 1990 levels during the period 2008-2012. During the second commitment period agreed to as part of the Doha Amendment to the Kyoto Protocol, Parties committed to reduce GHG emissions by at least 18 percent below 1990 levels in the eight-year period from 2013 to 2020.

    To achieve the targets set within the Kyoto Protocol, three flexible financial mechanisms were created. These were:

    • Emissions Trading: The international transfer of emission allocations between industrialised (Annex I) countries. 
    • The Clean Development Mechanism: Emissions reductions created through projects in developing countries.
    • Joint Implementation. Emissions reductions created through investments by an industrialised Annex I country to a project generating emissions reductions in another Annex I country.

    Emissions trading under the Kyoto Protocol allows countries that have emission units to spare – emissions permitted them but not “used” – to sell this excess capacity to countries that are over their targets.  The emission reductions arising from the Kyoto mechanisms are known as ‘carbon credits’. Each carbon credit represents reduction or the avoidance of one tonne of carbon dioxide equivalent (tCO2e) from the atmosphere. Transfers and acquisitions of these units are tracked and recorded through the registry systems under the Kyoto Protocol.

    Note also that the Kyoto Protocol requires Parties to account for emissions and removals from land use, land use change and forestry (LULUCF) activities by adding to or subtracting from their initial assigned amount. Net removals from LULUCF activities result in the issuance of additional emission allowances, called removal units or RMUs, which a Party may add to its assigned amount; Parties must account for any net emissions from LULUCF activities by cancelling Kyoto Protocol units. Calculation of the quantity of emission allowances to be issued or cancelled is subject to specific rules, which differ for each LULUCF activity.

    Further information on the Kyoto Protocol Mechanisms is available from the United Nations Framework on Climate Change (UNFCCC)

    • Domestic Schemes 

    Carbon pricing schemes may also be established as climate policy instruments at the national and regional level. The nature and scope of these varies considerably.

    Although only a few jurisdictions have emissions trading schemes or other carbon pricing mechanisms in operation, many others are in development. Those currently in place include:

    Note that Australia’s carbon pricing mechanism was repealed in 2014, replaced with an Emissions Reductions Fund.

    Further information on the state and trends of carbon pricing is available from the World Bank, among other sources.

  • Carbon Pricing Watch 2015 World Bank Group ECOFYS

    (4.0 MB PDF)

    Carbon market mechanisms in future international cooperation on climate change

    (434.2 KB PDF)