The Sky is Not the Limit: - Carbon Trade Watch

3. Trading Rules3.1 The Kyoto Trading RegimeWhile Kyoto is just one of the carbontrading regimes under development, itis the most advanced. It is also theplatform that legitimises the growth ofother trading schemes. For example,the emission targets in the KyotoProtocol create the scarcity inemissions that make a competitivemarket possible. The Kyoto tradingregime is a combined cap-and-tradeand cap-and-credit system. The capand-tradesystem is formed by settinga fixed quantity of permits (the cap),distributing them and allowing them tobe traded. The cap-and-trade systemis included in the Kyoto FlexibleMechanism “Emissions Trading”. Eachcountry that committed to a Kyotoreduction target has a quota ofpermits. The size of that quota comesfrom each country’s 1990 emissionslevel minus the amount they havecommitted to reduce.The credit-and-trade system is formedby allowing emission-reducing projectsto generate permits equivalent to theamount of emissions they save. Theproject based credit-and-tradesystems in the Kyoto Protocol are theClean Development Mechanism andJoint Implementation. Using Kyotogreenhouse gas emissions permits ismuch like using money in manyrespects. You can bank most permitsfor future use or sell them if you havean excess. If you run out of permitsyou can buy or borrow more.Governments trading improperly willgo to a court-like forum and couldeven be excluded from trading. If theybelieve they have been treatedunfairly, they also have the right toappeal. 1Money-like characteristics come fromthe rules set out in the Kyoto Protocol.An example is the interest rate forborrowing by governments, whichcomes from the penalty for overemittingin one emissions budgetperiod. The technical name for theemissions budget period is the‘compliance period’, the first of whichis 2008-2012. If at the end of 2012,you are missing 100 permits to makeyour emissions-budget balance, thenfor next compliance period you mustfind an extra 130 permits. That is, youpay an amount of 0.3 permits for everyton of greenhouse gas you fail toreduce. The interest rate of 30 percent for a five-year compliance periodtranslates into approximately a 5 percent yearly interest rate.If you are a corporation, you tradewithin legislation defined by thegovernment of the country you areactive in. It is however easy to form asubsidiary company, or if you are atransnational corporation to useinternal trading and take advantage ofbeneficial trading rules in the countryof your choice. There is no cap ontrading to promote domesticreductions at source and it is unclearhow governments could stop youtrading if they are in danger ofexceeding their emissions target. Ifyou are a multinational company youcan trade internally between differentnational arms of your corporation,taking advantage of schemes togenerate cheap permits in thedeveloping world.Combing through the myriad rulesgoverning this new system, the Kyotopermits can seem to be taking shapeas a credible new commodity.However, by comparison withcenturies of international trade, theKyoto commodity is young andmalleable. Rules attempting to protectthe commodity’s environmentalintegrity are fragile. It is questionablewhether these rules are robust enoughto survive the pressures ofinternational trade.20