The market of global warming.

The average temperature of the Earth's surface has risen by 0.6[degrees] Celsius since the late 1800s and is expected to increase by 1.4[degrees] to 5.8[degrees] by 2100. Such a drastic change has the potential to create serious consequences in the ecosystems and widespread damage to human society through floods, lower agricultural yields and extreme weather patterns. To prevent such a disastrous change in global temperature, the United Nations Framework Convention on Climate Change (UNFCCC) has led the way in the establishment of standards to curb global warming and dangerous climate change. With the coming into force on 16 February 2005 of the Kyoto Protocol-a legally binding agreement to reduce greenhouse gas (GHG) emissions worldwide (see UN Chronicle, Issue 3, 2004)-industrialized countries are required by 2012 to cut their emissions, on average, to 5.2 per cent below their 1990 levels. Developing nations are permitted to maintain their current emission levels, as they are more vulnerable to potential economic impacts of new environmental standards.

When people think of global warming, pollution immediately comes to mind, as well as how human activity is becoming one of the pre-eminent environmental issues of today. Behind the scenes, however, global warming has always been a tricky economic issue. In a world of short-term gain versus long-term consequences, big businesses and nations at large have been reticent in adopting measures to better the environment down the road at the cost of an expanding economy. While nations worldwide want to prevent the slow degradation of the environment, they are hesitant to risk jobs and profits to implement seemingly costly environment-saving measures.

This problem was given voice most prominently by the United States, whose argument was based on economic issues. The Convention realized that asking nations to adopt environmental measures without taking into account the inevitable high costs involved would create international resistance and backlash. As a result, the Kyoto Protocol provides several "flexible mechanisms", allowing nations access to cost-effective opportunities to reduce emissions in other countries. While the cost of limiting emissions may vary greatly from country to country, the effect on the atmosphere remains the same regardless of where the reduction occurs.

One such mechanism provides for industrialized countries, known as "Annex I" parties (see box on page 50), to acquire units from other countries and use them towards meeting their emission targets under the Kyoto Protocol. Emissions trading allows nations to take advantage of lower cost strategies, with a dual benefit of placing less of a burden on the economy and at the same time achieving the important goal of reducing the overall global emissions. This system is characterized by the "units" traded between nations, and the methods and strategies for lowering emissions can vary depending on the project agreed upon by the bartering countries. The amount to which an industrialized country must reduce its emissions over the five-year commitment period is divided into what is known as its "assigned amount units" (AAUs), each equal to one tonne of the carbon dioxide (C[O.sub.2]) equivalent. These AAUs and other units described in the Protocol define several economic and environmental strategies that countries can pursue in reducing emissions.

The first such unit that may be transferred involves a removal unit issued by an industrialized country on the basis of land use, land-use change and forestry activities, which employ the use of "sinks" or any process that removes greenhouse gas from the atmosphere. Utilizing sinks can provide a relatively cost-effective way of combating climate change by either increasing the removal of greenhouse gases from the atmosphere, such as through planting trees and managing forests, or reducing emissions by curbing deforestation. An emission reduction unit is generated by a joint implementation that allows industrialized countries to put into effect projects that reduce emissions in other industrialized countries, for example, by replacing a coal-fired power plant with a more efficient combined heat and power plant. A certified emission reduction is generated from a clean development mechanism that provide industrialized nations to reduce emissions in non-Annex I countries. Such projects generally focus on sustainable development for developing countries.

While these various units delineate the different projects a country can engage in to reduce emissions, how does a system of trading units between nations actually accomplish reducing the overall costs? With or without a flexible mechanism in place, the economic impact is obvious. As illustrated in the table (see page 49), without a trading system. Country A must pay twice as much to have the same and just as good emissions reduction as country B, needlessly burdening the economy of country A in order to achieve the same benefit for the atmosphere. In comparison, through emissions trading, both countries save $250 each in reduction costs by allowing Country A to simply buy from Country B the rights to 10 units, resulting in the same overall emissions reduction of 20 units at a smaller overall cost.

On a global scale, this will allow one nation to purchase credits from another in order to meet its emissions target without costly changes to its economy or infrastructure. The impact of such a system is twofold: it lowers the burden on the economies and spurs an economic incentive to reducing emissions below target levels. If an industrialized country through various projects and initiatives manages to reduce emissions more than necessary, trading will permit it to sell its surplus units to other countries that would otherwise have greater economic difficulty in reducing emissions.

The scope and presence of emissions trading and the Kyoto Protocol will only continue to grow in today's international market. According to Julian H. Richardson, Vice President in the Marine and Energy Practice of Marsh, in London, the Protocol's emphasis on trading has accelerated the development of greenhouse gas markets worldwide. There were 37 international, regional, national, local and company trading schemes in 2003. Denmark, for example, has established a cap-and-trade scheme for C[O.sub.2] produced by its power companies. Also, the first legislatively-backed national greenhouse gas market is the United Kingdom's Emissions Trading Scheme, which opened in April 2002, while a trading scheme within the European Union began in early 2005. The Chicago Climate Exchange in the United States, through a feasibility study funded by a grant in 2000, started its voluntary programme of emissions reduction and has had continuous electronic trading since December 2003.

Global warming continues to be a serious threat to the future of the environment, but it is a threat that remains to be under control. Flexible mechanisms, such as emissions trading, seek to ensure that a shift towards more environmentally friendly standards could be met without hindering the growing global market. These operations and the continuing commitment of the United Nations and other world powers will ensure a smoother economic transition into a cleaner world.

Parties to the Climate Change Convention

The United Nations Framework Convention on Climate Change divides countries into three main groups:

* Annex I Parties include industrialized countries that were members of the Organization for Economic Cooperation and Development (OECD) in 1992, plus those with economies in transition (EIT), including the Russian Federation, the Baltic States and several Central and Eastern European States.

* Annex II Parties consist of the OECD members of Annex I but are not EIT countries. They are required to provide financial resources to enable developing countries to undertake emissions reduction activities.

* Non-Annex I Parties are mostly developing countries, of which certain groups are recognized by the Convention as being especially vulnerable to the adverse impacts of climate change, including countries with low-lying coastal areas and those prone to desertification and drought. Others, such as countries that rely heavily on income from fossil fuel production and commerce, feel more vulnerable to the potential economic impacts of climate change response measures. Under the Convention, the 48 classified as least developed countries (LDCs) by the United Nations are given special consideration under the Convention due to their limited capacity to respond to climate change.

Without Trading                     With Trading

Countries A and B must reduce       Country B reduces emissions by 20
  emissions by 10 units each          units Country A buys rights to 10
                                      units
Reduction cost for Country A $100   Reduction cost for Country A $75
  per unit, or $1,000 for 10 units    per unit, or $750 for 10 units
Reduction cost for Country B $50    Reduction cost for Country B $50 per
  per unit, or $500 for 10 units      unit, $1,000 for 20 units less
                                      $750 (paid by country A) = $250
Total cost for both = $1,500        Total cost for both = $1,000

Source: Greenhouse Gas Emissions Trading: A Market Solution to Climate
Change, by Julian H. Richardson Copyright [c] 2003 by Marsh & Mclennan
Companies, Inc.