National Emissions Account
On an international level, the Kyoto Protocol is the current framework for reducing green house gas emissions. As part of it, 40 industrialized countries (Annex-1 countries) have committed themselves to reduce and stabilize their green house gas emissions by 5% below 1990 levels over a 5 year period (commitment period) from 2008 - 2012.
The U.S. has not ratified the protocol and is therefore not part of the Kyoto-based carbon market. Specific country targets vary from -8% (EU) to +5% (Australia) as set out in Annex-B of the protocol.
Each Annex-1 country is given an initial amount of emission allowances, AAUs (Assigned Amount Unit), calculated as follows:
AAU = Emissions in 1990 x target x 5
This represents the volume of the allowed emissions for the country over the commitment period. Some countries use another year as reference year, but the principle is the same.
Countries can achieve their targets by reducing their emissions as well as buying or selling allowances from other countries and projects by balancing their national emissions account,
by trading the following certificates:
Some additional restrictions and regulations apply. Here are the important ones:
Developing countries (Non-Annex-1 countries) have no reduction obligation. Instead, they can sell emission rights under the CDM framework to Annex-1 countries. Also, they get money and investment for low-carbon technologies from Annex-2 countries (a subset of Annex-1 countries).
Company Emissions Account
Where a company is subject to a mandatory emission trading scheme, its target emissions are set by the government. Otherwise, it is free to set itself a target at any level. Companies have the opportunity to balance their compliance gap by purchasing or selling project-based and traded certificates subject to legislation.
The largest mandatory emission trading scheme is the European Emissions Trading Scheme (EU-ETS), covering some 12,000 energy-intensive organisations emitting 2.3bn tons of CO2.equivalent green house gasses. The scheme is now in its second commitment period (2008 - 2012). It has transferred some of its AAUs to those companies by issuing equivalent EUAs (European Union Allowances).
A company can balance its emission account by reducing its emissions, as well as purchasing CERs and trading of allowances with other companies in the scheme. The following restrictions and rules apply:
As CERs are fungible with EUAs, there is a secondary market for CERs, which are also traded on the European Climate Exchange. EUAs however, tend to command a premium of around 1€. The price for EUA in 1Q2010 was about €13.
Voluntary Trading Scheme
In the U.S. where the Kyoto Protocol does not apply, companies have created a voluntary trading scheme by setting targets for themselves, perhaps in expectation of a mandatory scheme in future. Analogous to the European Trading Scheme, emission allowances (CFIs) can be traded on the Chicago Climate Exchange, CCX. The CCX has its own accreditation process for verification of projects.
Voluntary Offset Market
For organisations that want to purchase carbon offsets outside the trading schemes, can do so in the voluntary offset market. The Verified Emission Reduction certificates trade around €8 (for "gold standard" certificates and €4 for others.