The Kyoto Protocol envisages three market-based "flexible mechanisms": Emissions Trading, Joint Implementation and Clean Development Mechanism. These are to allow industrialised countries to meet their targets through trading emission allowances between themselves and gaining credits for emission-curbing projects abroad.

The rationale behind these three mechanisms is that greenhouse gas emissions are a global problem and that the place where reductions are achieved is of less importance. In this way, reductions can be made where costs are lowest, at least in the initial phase of combating climate change.

Detailed rules and supervisory structures have been set up to ensure that these mechanisms are not abused.

Emissions Trading

The Kyoto Protocol, once in operation, will set a limit on total emissions by the world's major economies, a prescribed number of "emission units." Individual industrialised countries will have mandatory emissions targets they must meet . . . but it is understood that some will do better than expected, coming in under their limits, while others will exceed them.

The Protocol will allow countries that have emissions units to spare -- emissions permitted them but not "used" - to sell this excess capacity to countries that are over their targets. This so-called "carbon market" -- so-named because carbon dioxide is the most widely produced greenhouse gas, and because emissions of other greenhouse gases will be recorded and counted in terms of their "carbon dioxide equivalents" -- is both flexible and realistic.

Countries not meeting their commitments will be able to "buy" compliance . . . but the price may be steep. The higher the cost, the more pressure they will feel to use energy more efficiently and to research and promote the development of alternative sources of energy that have low or no emissions.

Joint Implementation

Under joint implementation, an Annex I Party may implement a project that reduces emissions (e.g. an energy efficiency scheme) or increases removals by sinks (e.g. a reforestation project) in the territory of another Annex I Party, and count the resulting emission reduction units (ERUs) against its own target.

Clean Development Mechanism

Under the clean development mechanism (CDM), Annex I Parties may implement projects in non-Annex I Parties that reduce emissions and use the resulting certified emission reductions (CERs) to help meet their own targets. The CDM also aims to help non-Annex I Parties achieve sustainable development and contribute to the ultimate objective of the Convention.

The rulebook for the CDM set forth in the Marrakesh Accords focuses on projects that reduce emissions. Rules are being developed, however, for adoption at COP 9 in 2003, for including afforestation and reforestation activities in the CDM for the first commitment period. These rules include a limit on the extent to which Annex I Parties may use CERs from such sink projects towards their targets.

Joint Implementation (JI)

"Joint implementation" is a programme under the Kyoto Protocol that allows industrialised countries to meet part of their required cuts in greenhouse-gas emissions by paying for projects that reduce emissions in other industrialised countries. In practice, this will likely mean facilities built in the countries of Eastern Europe and the former Soviet Union -- the "transition economies" -- paid for by Western European and North American countries.

The sponsoring governments will receive credits that may be applied to their emissions targets; the recipient nations will gain foreign investment and advanced technology (but not credit toward meeting their own emissions caps; they have to do that themselves). The system has advantages of flexibility and efficiency. It often is cheaper to carry out energy-efficiency work in the transition countries, and to realize greater cuts in emissions by doing so. The atmosphere benefits wherever these reductions occur.

To go ahead with joint implementation projects, industrialised countries must meet requirements under the Protocol for accurate inventories of greenhouse-gas emissions and for detailed registries of emissions "units" and "credits" (steps that also are required for the international trading of emissions on the "carbon market"). If these requirements are met, countries may carry out projects and receive credits beginning in 2008.

A pilot phase begun in 1995 allowed countries to gain experience in co-operating and in sharing technology. Most of the numerous pilot projects carried out will not be translated into credits under the Protocol, but schemes begun after 1 January 2002 which meet all requirements may be registered under the joint implementation programme.

Clean development mechanism (CDM)

The Kyoto Protocol does not set limits on the greenhouse-gas emissions of developing nations. Yet the greenhouse-gas emissions of developing countries are growing, especially in the case of enormously populous states such as China and India, which are rapidly expanding their industrial output.

Because the atmosphere is equally damaged by greenhouse-gas emissions wherever they occur and equally helped by emissions cuts wherever they are made, the Protocol includes an arrangement for reductions to be "sponsored" in countries not bound by emissions targets. The so-called Clean Development Mechanism is loaded with complicated details and acronyms, but in simplified form it works this way: Industrialised countries pay for projects that cut or avoid emissions in poorer nations -- and are awarded credits that can be applied to meeting their own emissions targets. The recipient countries benefit from free infusions of advanced technology that allow their factories or electrical generating plants to operate more efficiently -- and hence at lower costs and higher profits. And the atmosphere benefits because future emissions are lower than they would have been otherwise.

The mechanism has drawn extensive interest from rich and poor countries alike, and steps have been taken to put it into operation even before the Protocol takes effect. In particular, it is cost-effective and offers a degree of flexibility to industrialised countries trying to meet their targets. It can be more efficient for them to carry out environmentally useful work in developing countries than at home, where land, technology, and labour are generally more costly. The benefits to the climate are the same.

The system also appeals to private companies and investors. The mechanism is meant to work bottom-up -- to proceed from individual proposals to approval by donor and recipient governments to the allocation of "certified emissions reduction" credits. Countries earning the credits may apply them to meeting their emissions limits, may "bank" them for use later, or may sell them to other industrialised countries under the Protocol's emissions-trading system. Private firms are interested in the mechanism because they may earn profits from proposing and carrying out such work and because they may develop good reputations for their technology which will lead to further sales. A possible benefit for everyone is that the potential for profits may lead these businesses to develop even more useful technologies.

An Executive Board that has already been established and already has approved a series of “methodologies” for large-scale and small-scale projects will oversee the Clean Development Mechanism.

To be certified a project must be approved by all involved parties demonstrate a measurable and long-term ability to reduce emissions, and promise reductions that would be additional to any that would otherwise occur. Over 30 projects are at an advanced stage of preparation.

A special provision allows credits earned under clean-development schemes to be valid and "bankable" now, although the Protocol has yet to take legal effect.

Options to the programme are being considered. Less red tape, for example, may be required for small-scale projects, such as renewable energy facilities below 15 megawatts of installed capacity. Another proposal is to allow afforestation and reforestation projects to be included in the scheme.