Kyoto Protocol

An international agreement that aims to reduce carbon dioxide emissions and the presence of greenhouse gases. Countries that ratify the Kyoto Protocol are assigned maximum carbon
emission levels and can participate in carbon credit trading.

Emitting more than the assigned limit will result in a penalty for the violating country in the form of a lower emission limit in the following period.

The Kyoto Protocol separates countries into two groups.

Annex I includes developed nations, while Non-Annex I refers to developing countries. Emission limitations are only placed on Annex I countries. Non-Annex I nations participate by
investing in projects that lower emissions in their own countries. For these projects, they earn carbon credits. These credits can be traded or sold to Annex I countries, which allow them a higher level of maximum carbon emissions for that period.

Carbon Trade came about in response to the Kyoto Protocol. Signed in Kyoto, Japan, by some 180 countries in December 1997, the Kyoto Protocol calls for 38 industrialized countries to reduce their greenhouse gas emissions between the years 2008 to 2012 to levels that are 5.2% lower than those of 1990.

Carbon is an element stored in fossil fuels such as coal and oil. When these fuels are burned, carbon dioxide is released and acts as what we term a "greenhouse gas".

The idea behind carbon trading is quite similar to the trading of securities in a marketplace. Carbon would be given an economic value, allowing people, companies or nations to trade it. If a nation bought carbon, it would be buying the rights to burn it, and a nation selling carbon would be giving up its rights to burn it. The value of the carbon would be based on the ability of the country owning the carbon to store it or to prevent it from being released into the atmosphere. (The better you are at storing it, the more you can charge for it.)

A market would be created to facilitate the buying and selling of the rights to emit greenhouse gases. The industrialized nations for which reducing emissions is a daunting task could buy the emission rights from another nation whose industries do not produce as much of these gases. The market for carbon is possible because the goal of the Kyoto Protocol is to reduce emissions as a collective.

On the one hand, carbon trading seems like a win-win situation: greenhouse gas emissions may be reduced while some countries reap economic benefit. On the other hand, critics of the idea suspect that some countries will exploit the trading system and the consequences will be negative. While carbon trading may have its merits, debate over this type of market is inevitable, since it involves finding a compromise between profit, equality and ecological concerns.