Perspectives on the Kyoto Protocol: Challenges and Opportunities

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Alexander Ferrigno

The Kyoto Protocol1 (“KP“) is often highlighted in discussions of international climate agreements, especially in comparison to its successor, the Paris Agreement. While the latter is hailed for its unprecedented global consensus, with 195 states coming together, critics argue that it lacks the ambition of Kyoto.

Adopted in 1997 but entering into force in 2005 – almost a decade later – the Kyoto Protocol aimed to reduce greenhouse gas (GHG) emissions to 1990 levels during its first commitment period from 2008 to 2012. Despite skepticism about its effectiveness, Kyoto was seen as a necessary step, laying the groundwork for future climate action.2 Its design was informed by successful international agreements like the Montreal Protocol, which effectively addressed ozone depletion.3 Participation in Kyoto also signaled a willingness among states to cooperate on climate change.

However, the protocol is widely deemed unsuccessful. Even with full compliance, achieving the target 5.2% reduction in GHGs from 1990 levels was always going to be challenging. The Intergovernmental Panel on Climate Change (IPCC) indicated that such reductions were insufficient, projecting that a 40% reduction would be necessary by 2020 to truly make an impact, a target far beyond reach.4

Compliance was a significant issue. Many countries, instead of reducing their emissions, saw increases. Canada, for example, had a 25% increase in CO2 emissions between 1990 and 2012.5 While some European countries did manage reductions, the overall picture was bleak: global emissions rose by 59% from the baseline year to 2013.6 This figure excludes major emitters like the United States and China, who were unbound by Kyoto’s targets. When focusing solely on KP participants, there was a slight decrease in emissions, but the broader goals remained unmet. Some states adopted policies that technically complied with Kyoto but did not contribute to real reductions.7

The protocol’s design flaws were significant. It encouraged specific emission reductions without promoting broader, fundamental policy changes. Notably, Germany and the UK set and pursued more ambitious voluntary targets independently.8 However, some states found some forms of exploitation through mechanisms KP created via the carbon market. Namely, States would abuse the “Carbon Credits” awarded for disposing of particular forms of GHG, by increasing their production of these GHG-producing industries then capturing said GHG. These credits could then be either used or sold to other States.9

Carbon Markets: Mechanisms and Implications

The concept of carbon markets emerged in 1990 with the idea of Joint Implementation (JI), first mentioned in Article 4.2 of the United Nations Framework Convention on Climate Change (UNFCCC),10 and later formalized in the Kyoto Protocol. The Kyoto Protocol established two core mechanisms to facilitate carbon markets: the Joint Implementation mechanism (Article 6) and the Clean Development Mechanism (CDM, Article 12). These mechanisms were designed to help countries meet their emissions targets through international cooperation.

Joint Implementation (JI)

Under the JI mechanism, developed countries (Annex I countries) can earn credits by investing in emission reduction projects in other developed countries. This mechanism aims to foster cooperation between developed nations to achieve their emission reduction goals. A key concept within JI is “additionality,” which requires that emission reductions from JI projects be additional to what would have occurred without the project.11 This ensures that the projects contribute real and measurable reductions in emissions. States are also required to pursue domestic measures to mitigate climate change independently of JI measures, as indicated by the “supplementary” nature of the mechanism.12 The specifics of these measures were clarified by the Marrakesh Accords, which established the baseline for JI projects and provided criteria for supplementary measures.13 It too clarified the baseline for Article 6 projects, stating the “baseline for an Article 6 project is the scenario that reasonably represents the anthropogenic emissions by sources or anthropogenic removals by sinks of greenhouse gases that would occur in the absence of the proposed project.”14 Importantly, it also gave “supplementary” a criterion, extending the application to the investment host State.15

Clean Development Mechanism (CDM)

The CDM allows developed countries to earn credits by investing in emission reduction projects in developing countries. This mechanism aims to transfer clean technology to developing nations and help them achieve sustainable development while contributing to global emission reductions.16 Like JI, CDM projects must demonstrate additionality. The CDM has been particularly beneficial for developing countries, as it provides financial incentives for sustainable projects and helps them transition to low-carbon technologies.

Testing and Implementation

Initially, the mechanisms were contested between developed and developing countries, leading to the development of Activities Implemented Jointly (AIJ), which served as a testing phase without generating emission credits.17 This allowed countries to experiment with different approaches to determine the most effective strategies for emission reductions. Developing countries favored investing in lower-cost mitigation projects within their borders, recognizing the economic benefits.18

Annex B Parties and Emission Targets

In 1997, the Kyoto Protocol established specific GHG reduction targets for developed countries (Annex B parties) and certain economies.19 These countries could use three carbon market mechanisms and take collective GHG commitments, known as the “bubble” concept,20 prominently used by the EU. With its quota distributed across the Member States, with some States receiving less or more percentage of said quota.21 Annex B parties were granted Assigned Amount Units (AAUs), which represented their emissions allowances. These AAUs could be traded or generated through emission reduction projects under the Kyoto Protocol’s International Emissions Trading (IET) scheme.22 JI projects (parties in Annex B) generated Emissions Reduction Units (ERUs), while CDM projects (non-Annex B parties) created Certified Emissions Reductions (CERs).23

International Oversight

The UNFCCC and the International Transaction Log (ITL) oversaw transactions between ERUs and CERs.24 States could also purchase additional emission allowances, but purchases under JI led to quota reductions,25 unlike CDM transfers.26 Emissions trading under JI and CDM was intended to be a cost-effective way for states to meet their quotas, with trading as a “supplemental” measure to avoid reliance on purchased credits over genuine emission reductions.27

The Rise of Carbon Markets

The popularity of carbon markets grew significantly after the Kyoto Protocol came into force in 2005. Scholars anticipated many benefits from these mechanisms, including the potential for significant financial gains while mitigating climate change, a projected “win-win”.28 Annex B countries influenced the size of the market through demand and host state institutional barriers.29 The European Union’s decision to allow ERUs and CERs to be used under Europe’s Emissions Trading System (ETS) triggered a boom in carbon markets,30 leading to what became known as the “Gold Rush.”

The carbon markets introduced by the Kyoto Protocol represented a significant innovation in international climate policy, providing mechanisms for cooperation, technology transfer, and cost-effective emission reductions. However, the implementation and effectiveness of these mechanisms have been subject to ongoing debate and analysis. For example, some states created the means to intentionally increase very particular GHG production in order to earn credits for then capturing and disposing of the gases they themselves created. Essentially, they created a sort of credit earning factory (mentioned above).

Concerns with the Kyoto Protocol and Carbon Markets

Prior to the entry into force of the Kyoto Protocol, several concerns were raised about the potential effectiveness and economic viability of the proposed carbon market mechanisms. One significant worry was the potential for low demand and low carbon credit pricing,31 which could undermine the market’s ability to incentivize meaningful emission reductions. To address these concerns, the idea of incorporating sustainable benefits was proposed. However, balancing these benefits with economic rationality posed a challenge for states.32

The Issue of “Hot Air”

A persistent issue in carbon markets, both historically and in contemporary settings, is the concept of “hot air.” This term refers to Assigned Amount Unit (AAU) credits that are traded without corresponding actual emission reductions. Essentially, “hot air” credits enable companies to meet their emissions targets on paper without implementing real reductions, potentially leading to an overall increase in emissions instead of a decrease. This phenomenon raises significant concerns about the environmental integrity of the carbon market. Some scholars also noted concerns that it could incentivise States to maximise credit gains via carbon-producing/capturing investments,33 then laundering these credits through JI.34

Additionality and Baselines

Another major concern revolves around the concepts of additionality and baselines. Additionality refers to the requirement that emission reductions must be additional to what would have occurred without the climate change regime in place. For a project to sell carbon credits, it must demonstrate that the project could not have occurred without the revenue from these credits.35 This concept is particularly crucial for Clean Development Mechanism (CDM) projects. Strong regulations on additionality are necessary to maintain environmental integrity, as there is a risk of developing crediting activities that would have been carried out regardless of the CDM.36

Baselines, which represent the scenario that would occur in the absence of a given project, also present challenges. Overestimating baselines can inflate the perceived emission reductions, thereby undermining the effectiveness of the mechanisms. States might weaken their domestic energy policies to maximise AAU potential,37 which further complicates the accuracy and reliability of baselines.

Environmental Integrity and Economic Efficiency

Maintaining environmental integrity and economic efficiency was a central concern in the design and implementation of the Kyoto Protocol’s carbon market mechanisms. The “gold rush” for carbon credits led to a focus on low-hanging fruit—projects that were easy to implement and met the letter of the Protocol but often failed to achieve significant or ambitious emission reductions. This approach limited the overall effectiveness of the mechanisms and led to only minor shares of greenhouse gas (GHG) reductions being captured.38

Failures and Delays

Many carbon credit projects, particularly under the CDM, faced significant issues such as project delays, underperformance, or delays in the issuance of Certified Emission Reductions (CERs). As a result, only a fraction of the expected CERs were actually issued.39 This inefficiency highlighted the challenges in ensuring that projects delivered their promised environmental benefits.

To address some of these issues, additional standards like the “Gold Standard” were implemented.40 These standards aimed to enhance the credibility and environmental integrity of carbon credits. Interestingly, more than half of the states were willing to pay a premium for Gold Standard-certified credits,41 which were particularly beneficial to poorer states. For instance, China preferred projects in these regions due to the economic benefits they provided, demonstrating that the additional costs were outweighed by the perceived benefits.42

Economic Versus Ecological Priorities

Despite the implementation of these standards, the overall environmental impact of the Kyoto Protocol’s flexible mechanisms remained limited.43 The focus on achieving emission reductions through economic devices rather than ecological solutions led to a shift in the nature of the problem. Instead of fostering significant environmental change, the mechanisms often became tools for economic transactions that did not necessarily translate into real-world emission reductions. Specifically, poorer States would develop projects under CDM, furthering the Kyoto Protocol’s goals, and boosting “cleaner” energy, yet the benefits created were diverted to other States, away from the local community for economic considerations.44

This was evident when comparing the Kyoto Protocol to other successful international agreements, such as the Helsinki Protocol,45 which effectively reduced sulfur dioxide emissions.46 The success of the Helsinki Protocol and similar initiatives, like the Protocol of Oslo and the Protocol of Gothenburg, allowed for increased ambition in subsequent agreements.47 However, the Kyoto Protocol did not achieve the same level of success, and the impact of its flexible mechanisms was only a fraction of what was initially hoped for. Even in regions like the EU, which took the implementation of these instruments seriously, the results were underwhelming.48

The Broader Impact and Legacy

While the Kyoto Protocol faced many challenges and criticisms, it is important to acknowledge that its implementation likely prevented a sharper spike in GHG emissions. Without the Protocol, the lack of any concerted international effort could have resulted in even higher emissions. Nevertheless, the transformation of the carbon market mechanisms from ecological solutions to primarily economic devices underscored the need for more effective and integrated approaches to climate change mitigation.

In conclusion, the Kyoto Protocol highlighted both the potential and the pitfalls of using market-based mechanisms to address global environmental issues. The concerns about additionality, baselines, and “hot air” credits, along with the economic incentives that sometimes overshadowed ecological goals, revealed the complexities of balancing economic and environmental priorities. These lessons are crucial for informing future climate agreements and ensuring that they achieve meaningful and sustained reductions in global emissions.

Fragmentation and Criticisms of the Kyoto Protocol

As the Kyoto Protocol entered its later stages, fragmentation within the carbon market emerged due to various factors. In the twilight years of the Protocol (2011-2012), demand for carbon credits from Joint Implementation (JI) and Clean Development Mechanism (CDM) projects began to wane. This decline was largely attributed to the issuance of Assigned Amount Units (AAUs) reaching their cap. The cap was intended to ensure that a significant portion of global emissions reductions occurred domestically rather than through market mechanisms,49 but in practice, this wasn’t always the case. The European Union (EU), which operated one of the most robust Emissions Trading Systems (ETS), proposed removing the cap limit under their linking directive. However, the European Commission maintained the cap,50 resulting in the disappearance of the dominant demand source as the market exceeded its quantitative limit of offsets.51

Market Dynamics and Second Commitment Period

With the quantitative limit surpassed, many states found themselves unable to acquire the necessary credits to comply with Kyoto Protocol directives. This uncertainty cast doubt on the second commitment period of the Protocol, leading to a decline in demand. The failure to secure the necessary number of ratifiers for the second commitment period illustrated the prevailing uncertainty.52 Additionally, some states began to shift their focus to more favorable regimes or jurisdictions, a phenomenon known as forum shifting.53 This was evident as negotiations for new regimes commenced and states began to move towards other initiatives, even while discussions for the second commitment period were ongoing.54 Despite the fragmentation, it is arguable that these alternative initiatives may have had a more significant impact on climate change mitigation than Kyoto itself i.e. The Montreal Protocol.

Contradictions and Market Oversupply

The concept of emissions trading through the carbon market, while innovative, revealed inherent contradictions in achieving its ecological aims. The market mechanisms created an economic pursuit out of an ecological goal. Winter aptly describes this contradiction, suggesting that an entrepreneur not utilising or selling allowances appears economically irrational, just as a state not using or selling surplus credits appears politically incompetent.55 The end of the Kyoto era was anticipated by states like Russia and Ukraine, which generated a surplus of credits through JI projects and sold them rapidly, resulting in market oversupply.56 This rush to sell credits indicated an awareness of the impending changes and the future of AAUs.

Supplementarity and Domestic Action

The design of the Protocol did not support the integration of credit sales into emissions counting, especially during the second allocation period. This period allowed for importing allowances into an ETS (like EU CERs from CDM projects), which increased assigned emissions without being counted,57 thereby undermining the initial goals set during the first allocation period.58 CDM projects, often investments in developing states, allowed these states to adopt an ecological laissez-faire approach, relying on foreign investments for climate mitigation rather than developing domestic regulations. While the Protocol’s Article 17 required trading to be supplemental to domestic action, this criterion applied only to JI projects and not CDM projects.59 States like China, the EU, and various developing nations advocated for stricter supplementarity rules, but the umbrella group of developed nations preferred more lenient regulations.60

Legacy and Transition to the Paris Agreement

Overall, the Kyoto Protocol has been criticized for its inadequacies,61 but it was a necessary step to establish a framework for future climate action. The Paris Agreement, which succeeded the Kyoto Protocol, aimed to address and rectify the shortcomings of its predecessor. A following article (to be uploaded later and linked here upon completion) will explore how the mechanisms developed under the Kyoto Protocol have evolved or been retained in the Paris Agreement and how they address the mistakes of the past.

  1. UNFCCC, Kyoto Protocol to the United Nations Framework Convention on Climate Change adopted at COP3 in Kyoto [1997] ↩︎
  2. Amanda M Rosen, ‘The Wrong Solution at the Right Time: The Failure of the Kyoto Protocol on Climate Change’ (2015) 43 Politics & Policy 30-58, 31 ↩︎
  3. Montreal Protocol on Substances that Deplete the Ozone Layer (1987) ↩︎
  4. Rosen (n 2) 36 ↩︎
  5. ibid ↩︎
  6. ibid ↩︎
  7. ibid 39 ↩︎
  8. ibid ↩︎
  9. ibid ↩︎
  10. United Nations Framework Convention on Climate Change ↩︎
  11. Kyoto (n 1) Article 6 (1) (b) ↩︎
  12. Article 6 (1) (d) ↩︎
  13. The Marrakesh Ministerial Declaration Decision 1/Cp. 7 ↩︎
  14. ibid Appendix B (1) ↩︎
  15. Decision 15/CP.7 No 1 ↩︎
  16. Kyoto (n 1) Article 12 ↩︎
  17. Axel Michaelowa, Igor Shishlov and Dario Brescia, ‘Evolution of international carbon markets: lessons for the Paris Agreement’ (2019) 10 WIREs Clim Change 1-24, 2 ↩︎
  18. ibid ↩︎
  19. Kyoto (n 1) Annex B ↩︎
  20. ibid Article 4 (1) ↩︎
  21. Council Decision (EC) 2002/358 concerning the approval, on behalf of the European Community, of the Kyoto Protocol to the UNFCCC and the joint fulfilment of commitments thereunder [2002] OJ L130/1-3 ↩︎
  22. Kyoto (n 1) Article 17 ↩︎
  23. Igor Shishlov, Romain Morel and Valentin Bellassen, ‘Compliance of the parties to the Kyoto Protocol in the first commitment period’ (2016) 16 Climate Policy 768–782, 775 ↩︎
  24. ibid ↩︎
  25. Kyoto (n 1) Article 3 (10) ↩︎
  26. Gerd Winter, ‘The Climate is No Commodity: Taking Stock of the Emissions Trading System’ (2010) 22 J’ Env Law 1-25, 3 ↩︎
  27. Kyoto (n 22) ↩︎
  28. See generally Catrinus J Jepma and Wytze Van Der Gaast, ‘The Potential of Flexible Instruments Under The Kyoto Protocol’ (1998) 10 Int’ J of Env & Pol 476–484 ↩︎
  29. Michaelowa (n 17) 3 ↩︎
  30. ibid 4 ↩︎
  31. See generally Frank Jotzo and Axel Michaelowa ‘Estimating the CDM Market Under the Marrakech Accords’ (2002) 2 Climate Policy 179–196 ↩︎
  32. Michaelowa (n 17) 3 ↩︎
  33. Yda Schreuder and Christopher Sherry, ‘Flexible Mechanisms in the Corporate Greenhouse: Implementation of the Kyoto Protocol and the Globalization of the Electric Power Industry’ (2001) 12 Energy & Environment 487–498 ↩︎
  34. ibid ↩︎
  35. Michaelowa (n 17) 3 ↩︎
  36. ibid ↩︎
  37. ibid 3-5 ↩︎
  38. ibid 6 ↩︎
  39. ibid ↩︎
  40. Gold Standard, accessible www.goldstandard.org ↩︎
  41. Piya Parnphumeesup and Sandy Kerr, ‘Willingness To Pay For Gold Standard Carbon Credits’ (2015) 10 Economics, Planning, and Policy 412–417 ↩︎
  42. Michaelowa (n 17) 6 ↩︎
  43. Winter (n 26) 15 ↩︎
  44. Jean-François Rousseau ‘Does carbon finance make a sustainable difference? Hydropower expansion and livelihood trade-offs in the Red River valley, Yunnan Province, China’ (2017) 38 Singapore Journal of Tropical Geography 90–107, 99 ↩︎
  45. The 1985 Helsinki Protocol on the Reduction of Sulphur Emissions or their Transboundary Fluxes by at least 30 per cent [1985] ↩︎
  46. ibid ↩︎
  47. Declaration of Principles on Interim Self-Government Arrangements (Oslo Accords) [1994]; Protocol to Abate Acidification, Eutrophication and Ground-Level Ozone (Gothenburg Protocol) [1999] ↩︎
  48. Winter (n 26) 15 ↩︎
  49. Michaelowa (n 17) 9 ↩︎
  50. Karoline Flåm, ‘Restricting the import of ‘emission credits’ in the EU: A power struggle between states and institutions’ (2009) 9 Politics, Law and Economics 23-38 ↩︎
  51. Michaelowa (n 17) 9 ↩︎
  52. ibid ↩︎
  53. Rosen (n 2) 38 ↩︎
  54. ibid ↩︎
  55. Winter (n 26) 17 ↩︎
  56. Michaelowa (n 17) 9-10 ↩︎
  57. Winter (n 26) 17 ↩︎
  58. ibid ↩︎
  59. ibid 20 ↩︎
  60. Asbjorn Torvanger, ‘An evaluation of Business Implications of the Kyoto Protocol’ (2001) 5 CICERO 1-21, 2 ↩︎
  61. Rosen (n 2) 31 ↩︎
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