Carbon trading simply explained

GLOSSARY

AAUs
Assigned Amount Units. Allowances for carbon emissions under the Kyoto Protocol's emission trading mechanism. Each unit equates to one tonne of CO2e.

Annex I, or Annex B
The signatory nations to the Kyoto Protocol that are subject to caps on their emissions of greenhouse gases and committed to reduction targets - countries with developed economies. Annex I refers to the 36 countries identified for reduction in the UNFCCC, while the Annex B is an adjusted list of 39 countries identified under the more recent Kyoto Protocol. Annex B countries have their reduction targets formally stated.

Annex II
A subset of Annex 1/B, Annex II countries are signatory nations to the UNFCCC, which are also members of the OECD - the most industrialised economies. They have extra obligations to help developing nations combat climate change via technology transfer and financial help.

Asia-Pacific Partnership on Clean Development and Climate (AP6)
The Asia-Pacific climate pact is a rival international climate change agreement to the Kyoto Protocol. Its initiators are the United States and Australia - the only two industrialised nations not to ratify the Kyoto treaty - and the group also includes China, India, Japan and South Korea. AP6 rejects Kyoto-style emission reduction targets in favour of encouraging business to invest in clean fossil fuel technology and renewable energy.

Baseline and credit
A type of emissions trading scheme where firms are encouraged to reduce their greenhouse gas emissions below a projected 'business as usual' path of increasing emissions. Any reductions below that future path earns credits for the difference, which can be sold to other emitters struggling to contain increases to baseline levels. See also cap and trade.

Biofuels
Biofuels are renewable fuels made from plants that can be used to supplement or replace the fossil fuels petroleum and diesel used for transport. The two main biofuels are ethanol and biodiesel.
Ethanol is produced from the fermentation of sugar or starch in crops such as corn and sugar cane. Biodiesel is made from vegetable oils in crops such as soybean, or from animal fats. Depending on the processes used to make biofuels, greenhouse emissions from cars and fuel-powered machinery can be substantially reduced by their use.

Cap and trade
The most popular type of emissions trading scheme - where emissions are subject to a cap. Permits are issued up to that cap and a market allows those emitting less than their quota of the cap, to sell their excess permits to emitters needing to buy extra to meet their quota. See also baseline and credit.

Carbon neutral
An individual, family or organisation that is responsible for no net emissions of greenhouse gases from all its activities, is considered 'carbon neutral'. Emissions must be cut to a minimum and any necessary emissions then offset by emission-reducing activities elsewhere. Buying accredited clean electricity helps cut household or office greenhouse emissions - while investing in sustainable energy projects or afforestation schemes are examples of offsets.

Carbon positive
An individual, family or organisation that is responsible for taking more greenhouse gases out of the atmosphere than it emits, is said to be 'carbon positive'. This requires paying for activities such as forest planting or investing in renewable energy.

CDM
Clean Development Mechanism. A Kyoto Protocol initiative, under which projects set up in developing countries to reduce atmospheric carbon, generate tradable credits called CERs. The credits can be used by industrialised nations to offset carbon emissions at home and meet their Kyoto reduction targets. The projects include afforestation, reforestation and implementation of clean fuels technology.

CERs
Certified Emission Reductions. Credits generated under Kyoto's Clean Development Mechanism (CDM). They are designed to be used by industrialised countries to count toward their Kyoto targets, but can also be used by EU companies and governments as offsets against their emissions under the EU Emissions Trading Scheme.

EITs
Economies In Transition. Those nations in Annex I of the Kyoto Protocol, considered developed but currently in transition to a market economy. Generally, the nations and former republics of the old Soviet brbloc.

Emissions trading
A market-based system for regulating the emission of greenhouse gases. The quantity of emissions is controlled and the price allowed to vary by the issuing of tradeable emission permits. These rights to emit can be traded in a commercial market under an emissions trading scheme. More in FAQs

ERUs
Emission Reduction Units. Tradeable credits generated from activities to reduce greenhouse emissions in former Soviet-bloc countries under the Kyoto Protocol's Joint Implementation (JI) mechanism.

ETS
Emissions Trading Scheme. More in FAQs

EUA
European Union Allowances. Tradeable emission credits from the European Union Emissions Trading Scheme. Each allowance carries the right to emit one tonne of carbon dioxide.

GHG
Greenhouse gases. More in FAQs

GWP
Global warming potential. This refers to the potency of greenhouse gases - that is, their ability to trap heat in the atmosphere. The GWP is a numerical measure relative to carbon dioxide - the most abundant greenhouse gas - so, carbon dioxide itself has a GWP of 1. For the GWPs of all greenhouse gases - see FAQs.

IPCC
Intergovernmental Panel on Climate Change. An international scientific panel charged with informing the UNFCCC with the latest scientific evidence on climate change. With representatives from 130 nations, it is the world's pre-eminent scientific advisory body on global warming.

JI
Joint Implementation. A Kyoto Protocol mechanism, which allows developed countries - particularly those in transition to a market economy - to host carbon-reducing projects funded by another developed country. The arrangement sees the credits generated - called ERUs - go to the investor country, while the emission allowances (AAUs) of the host country are reduced by the same anount.

Kyoto Protocol
See FAQs

LULUCF
Land use, land use change and forestry. The term given to tree-planting projects, reforestation and afforestation - designed to remove carbon from the atmosphere.

NAPs
National Allocation Plans. These set out the overall emissions cap for countries in the EU Emissions Trading Scheme and the allowances that each sector and individual installation within each country receives.

PDD
Project Design Document. The official application drawn up by an entity applying for project approval under the Clean Development Mechanism (CDM). PDDs must be validated by an independent third party, then approved and registered by the CDM Executive Board, before a project qualifies as a CER carbon credit earner.

RMUs
Removal Units. Credits earned from land use, land-use change and forestry projects (LULUCF) in industrialised countries - including such projects under the Kyoto Protocol's JI mechanism.

tCO2e, MtCO2e
Tonnes of carbon dioxide equivalent and millions of tonnes of carbon dioxide equivalent. This is the metric measurement unit for greenhouse emissions. The global warming impact of all greenhouse gases is measured in terms of equivalency to the impact of carbon dioxide (CO₂). For example, one million tonnes of emitted methane - a far more potent greenhouse gas than carbon dioxide - is measured as 23 million tonnes of CO₂ equivalent, or 23 MtCO₂e.

UNFCCC
The United Nations Framework Convention on Climate Change - also referred to, more informally, as the UN climate change convention. It is the international agreement for action on climate change and was drawn up in 1992. A framework was agreed for action, aimed at stabilising atmospheric concentrations of greenhouse gases.
The UNFCCC entered into force on March 1994 and, currently, has 189 signatory parties. The UNFCCC, in turn, agreed the Kyoto Protocol in 1997 to implement emission reductions in industrialised countries.

VERs
Verified Emission Reductions. Tradeable credits for greenhouse emission reduction activities generated to meet voluntary demand for carbon credits by organisations and individuals wanting to offset their own emissions.