UN CO2 credits: What are they and how do they work?

Industrialised nations can meet UN-sanctioned greenhouse gas targets by buying emissions credits under three different trading schemes now worth billions of dollars a year.

The schemes, involving countries from industrial giants such as Germany to tiny Iceland and the former eastern bloc, aim to encourage greater energy efficiency as world nations try to agree on a broader climate deal by the end of 2009.

Following are brief descriptions of the three schemes that come under the UN Kyoto Protocol climate pact, which binds about three dozen nations to meet emissions targets each year between 2008 and 2012.

Clean development mechanism

Companies and governments of rich nations can offset their carbon emissions through investment in clean-energy projects in developing countries. The projects are vetted and if approved by the governing UN agency, are issued with Certified Emission Reductions (CERs) offsets, tradeable units that represent one tonne of carbon dioxide-equivalent saved from being emitted.

By the end of 2008, the UN has approved, or registered, 1,299 CDM projects, representing an annual average flow of nearly 244 million CERs until 2012. A further 4,200 projects are in the pipeline awaiting formal vetting and possible registration.

Joint implementation

Industrialised nations can also meet their obligations by investing in clean-energy projects in other rich nations to generate Emission Reduction Units (ERUs). These are also tradeable, though typically command a lower price per tonne than CERs. Most JI projects have occurred in former Soviet bloc nations.

Emissions trading

Under Kyoto, all industrialised countries listed in Annex 1 of the pact issue emissions credits called Assigned Amount Units (AAUs). These are calculated with reference to their emissions against Kyoto's 1990 baseline year. Each AAU represents a tonne of CO2-equivalent.

Many former Soviet bloc countries have an excess of AAUs after an industrial collapse in the 1990s and some have been selling these to nations well above their Kyoto targets to help them meet their emissions reduction obligations.

The problem with many of these excess AAUs is they are not necessarily tied to any emissions-cutting projects and have been criticised for doing nothing in the fight against global warming.