Delegates from 192 countries met in Copenhagen in late December 2009 to discuss ways to reduce global carbon emissions, which are widely acknowledge to contribute to global warming. The Conference was made necessary because the existing global targets, as set out in the Kyoto Protocol, are due to expire in 2012. While the Summit failed to reach a full and binding agreement on carbon reduction,  which would have required developed countries to reduce their emissions by 2020 to between 25% and 45% of 1990 levels, delegates accepted a US backed compromise – the Copenhagen Accord. This requires the developed countries to pay £18.5 billion to the developing countries by 2012, rising to £62 billion per year by 2020, to help them adjust to a low-carbon future. In return, the expectation is that developing countries will open themselves up to inspection and verification. Developed countries have pledged to provide detailed plans for carbon reduction to the United Nations (UN).

There was also a pledge to try to prevent global temperatures rising by 2 degrees centigrade above preindustrial levels.


The Kyoto Treaty

The purpose of the Kyoto Treaty, signed in Kyoto, Japan, in 1997, was to make the major industrialised economies of the world commit to reducing their greenhouse gas emissions in two phases. The first phase ends in 2012, and the agreement states that signatories should reduce emissions to levels less than those occurring in 1990 by that date. The Treaty was signed by 156 countries and came into effect in 2004.

The target for the first phase was for the EU as a single trading bloc to cut emissions by 8%, with the UK independently agreeing to a 20% reduction by 2010. Developing countries are not subject to the agreement, though they have been encouraged to become more ‘environmentally conscious’. Many are concerned that, as a developing economy, China is not subject to the limits agreed in Kyoto, yet it is predicted that China will become one of the planets biggest polluters over the next 10 years.

By 2003 the UK had reduced its greenhouse gases by 13% from its 1990 levels, and by 2006, emissions had fallen by 20%. (Source: However, other countries had not been so successful, with emissions from Spain and Portugal up by 42% and 37% respectively. (Source: The Times, December 2005).

Under the Kyoto rules, if countries exceed their agreed limits in the first phase (2008-2012) they are penalised by having to make up for the ‘overshoot’, plus a 30% further reduction, in the second phase (from 2013.)

In global terms, growth in car usage and air travel is likely to make it difficult to achieve any of the targets. Unfortunately, the world’s biggest polluter, the US, pulled out of the agreement in 2001, though Russia did eventually join in 2004.

Despite the first and second oil crisis, during which the price of oil rose sharply, and the Kyoto Protocol, global carbon emissions have continued to rise over the last 30 years.


The economic theory of pollution suggests that producers and consumers do not take carbon and other chemical emissions into account when they calculate their marginal private cost and benefit. This makes it extremely difficult for markets to resolve the pollution problem.

Markets could work efficiently if those suffering from a specific instance of pollution could identify the specific polluter, and could sue them. In this case, the polluter will consider the fine, or legal damages, a marginal private cost, and, to avoid further costs, will reduce pollution. This would work with noise pollution from a specific factory, because local residents could take the owners to court. However, with carbon pollution,  property rights over the atmosphere cannot be established, and specific polluters cannot be identified and sued directly. This means that there is no ‘built-in’ incentive to be a non-polluter.

There are a number of remedies proposed under the Kyoto Treaty, and by environmental economists. Remedies can either exploit the price mechanism’s ability to signalration and provide incentives, or they involve legislation and compulsion.

Two schemes that arose from Kyoto were the EU Emissions Trading market and ‘carbon-offsetting’ through the Clean Development Mechanism (CDM).

Tradable pollution permits

Tradable permits provide an incentive to polluters to ‘internalise’ the externality. Tradable permits to pollute involve:

  1. The government, or an appointed agency, selling the right to generate a given quantity of pollution to firms in an industry.
  2. These can be bought, and traded, with the result being:
  1. The high polluters have to buy more permits, which increases their costs, and makes them less competitive and less profitable.
  2. The low polluters receive extra revenue from selling their surplus permits, which makes them more competitive and more profitable.
  3. There is clearly an incentive to be a non-polluter!

Tradable Permits in the EU

In response to the Kyoto Protocol the European Council adopted the Emissions Trading Directive in 2003. This directive  set up a timeframe for the establishment of the European Emissions Trading Scheme (ETS).

Participants can:

  1. Meet their emissions target by reducing their own emissions, or:
  2. Reduce their emissions below their target and then sell, or store, the excess emission allowances, or:
  3. Allow their emissions to stay above their target, and therefore purchase emissions allowances from other participants