Compliance, also referred to as mandatory or regulatory, crediting systems are regulated by national, regional, or provincial law, and are typically operated in conjunction with mandates on large emission sources to lower their GHG emissions to an established level (i.e., “cap” or limit on released emissions) while allowing trading of permits (i.e., allowances) to emit. For the regulated emissions sources, carbon credits may serve as an alternative compliance instrument to directly lowering emissions or surrendering emission allowances equal to their actual emissions. Carbon credits generated and traded for regulatory compliance typically exhibit commodity pricing, where all carbon credits in a particular program are priced similarly based on the dynamics of supply-and-demand, regardless of project type and other characteristics.
Well established compliance programs exist as regional or national cap-and-trade emission trading systems, such as the Regional Greenhouse Gas Initiative (RGGI) or the European Union Emissions Trading Scheme (EU ETS). The World Bank Carbon Pricing Dashboard tracks which countries have implemented compliance crediting programs and other carbon pricing instruments. The ICAP ETS Map is another publicly available tool which tracks carbon pricing programs globally and provides information, such as whether the program includes a crediting program or not.
United Nations Crediting Programs
In the past, crediting programs were created under the Kyoto Protocol, which significantly shaped carbon crediting markets and programs to this day, including new crediting mechanisms under Article 6 of the Paris Agreement. For content related to the Paris Agreement and Article 6 follow this link.
Crediting Programs under the Kyoto Protocol
The Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC) established a cap-and-trade system between countries that included negotiated national caps on the GHG emissions of high-income countries that ratified the Protocol (called Annex B countries). Each participating country was assigned an emissions target and the corresponding number of allowances – called Assigned Amount Units (AAUs).
Under the treaty, a group of industrialized countries and countries with economies in transition (EIT) had legally binding commitments to reduce their overall national inventory GHG emissions to 5% below 1990 levels during the period 2008–2012. Each country within the group also had a separate target that ranged between an 8% reduction to a 10% cap on increases in emissions.
Countries agreed to meet their targets within a designated period of time by:
- Lowering their own emissions; and/or
- Trading emissions allowances with countries that had a surplus of allowances; and/or
- Meeting their targets by purchasing carbon credits.
The purpose of allowing trading between countries was to lower the overall costs of reducing national inventory emissions. To generate carbon credits, the Kyoto Protocol established project-based crediting programs referred to as “mechanisms”: the Clean Development Mechanism (CDM) and Joint Implementation (JI).
JI was the instrument for crediting projects taking place within countries with binding emission commitments under the Kyoto Protocol (most high-income countries), while the CDM was for crediting projects in countries without such commitments (most low or middle-income countries). In addition to economic efficiency, the CDM had the objective of promoting sustainable development and technology transfer in host countries.
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