The Kyoto Protocol to the United Nations Framework Convention on Climate Change treats the largest source of greenhouse gas – carbon emission – as a tradeable commodity. The unit of measurement is tons of carbon dioxide equivalent (tCO2e).
There are 3 mechanisms involved in carbon trade:
- Clean Development Mechanism (CDM)
This mechanism has been developed in response to the Kyoto Protocol to the United Nations Framework Convention on Climate Change. CDM assists developing nations who have no carbon emission limits (this group includes the majority of African, Central American, and South American nations) to achieve sustainable development objectives through the help provided by developed nations with carbon limits. On the other hand, developed nations (the US or EU nations) can achieve its carbon emission targets by purchasing carbon offsets from developing countries.
Following the withdraw of the US from the COP21 Paris Accords, whether developed nations will continue to pay remains to be seen, with the fate of CDM still in the air.
- Joint Implementation (JI)
Under the supervision of the “Supervisory Committee”, developing nations conduct the verification and transfer (or acquisition) of Emission Reduction Unit (ERU) among themselves.
For developing nations who face a higher cost in carbon emission reduction, they can invest in carbon reduction projects in other developing nations that have a comparatively lower cost in carbon emission reduction. This allows the nation in question to reduce the cost of carbon emission reduction and secure ERUs. On the other hand, developing nations with a lower cost in carbon emission reduction will be able to acquire investment funds and advanced carbon emission reduction technology.
- Emissions Trade (ET)
Units with high volume of carbon emissions can purchase carbon rights from counterparts with the lowest carbon emissions (seller) in the carbon market. The government announced its plans to create a carbon exchange dedicated to Taiwan by 2020, but by the looks from current plans, it would appear highly unlikely before the next presidential elections.