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The Kyoto Protocol: How climate regulation impacts businesses

Part 1 of our “Short History of COP” series, in this piece we outline what The Kyoto Protocol is, how it impacted businesses & how these impacts may expand in the future.

Part 1 of our “Short History of COP” series, in this piece we outline what The Kyoto Protocol is, how it impacted businesses & how these impacts may expand in the future.

The Beginnings of COP

Since 1995, the world’s leading nations have met annually to discuss and collaborate on climate action. COP (The first”Conference Of the Parties”) began in Berlin, with the mandate to monitor and review the implementation of the United Nations Framework Convention on Climate Change (UNFCCC).

At the first COP summit (COP1) the Berlin Mandate set the scene for the Kyoto Protocol, which was then adopted at COP3 in 1997. The Kyoto Protocol was a landmark piece of climate policy which operationalised the UNFCCC and meant that developed countries set targets to reduce GHG emissions and report on their progress.

The Kyoto Protocol entered into force in 2005 after a drawn out ratification process, but is still influencing your business through policy today (with some amendments).

How has the Kyoto Protocol affected your business?

The Kyoto Protocol introduced some major impacts on businesses:

  • Emphasising the idea of additionality in emissions reduction strategies
  • Its mechanisms began to put a price on carbon
  • Introduction of measuring and recording GHG emissions

The idea of additionality is important for the mechanisms introduced by the Kyoto Protocol. Additionality has become a defining feature of carbon offsetting. Many businesses use carbon offsets, and these can only be considered high quality if the associated project causes carbon reductions that would otherwise not have happened, and if the project would not have happened without the expectation of earning saleable carbon offsets.

Putting a price on carbon through the mechanisms introduced by the Kyoto Protocol was a step towards internalising the environmental costs of GHG emissions, and this had multiple impacts on businesses. Less carbon intensive projects became more financially viable for businesses, and the financial justification for being more climate friendly as a business started to become more widely accepted.

Another impact of the Kyoto Protocol for businesses was that it became more important for businesses to measure and record their emissions; you can’t effectively manage and reduce something you’re not actively measuring. With this growth in emissions measurement came the difficulty of reporting and measuring, and businesses had to invest more time and money into reporting against sometimes complicated standards.

What regulation was used to achieve this?

Important outcomes both directly from, and as a resulting impact of, the Kyoto Protocol were:

  1. Emissions Trading Systems
  • Emissions units are allocated to participants, and if certain members have produced fewer emissions than are allocated to them, they can sell these emissions units to others. This means that countries who overshoot their allocations can purchase the spare emissions units of others.
  • By using this mechanism, large emitters have to pay to emit past their limit. This incentivises reduced emissions.

2. The Clean Development Mechanism

  • This allows participants who have set targets through the Protocol to create emission reduction projects in developing countries, to earn themselves certified emissions reduction credits, which can be sold.

3. Joint Implementation

  • This approach allows a participant with emissions reduction or limitation targets to join up with another participant that also has targets set under the Kyoto Protocol. So, one participant can earn Emission Reduction Units from a project that is actually taking place in another participant’s country.

Will these impacts expand in the future?

Putting a price on carbon was initially only a real concern for big emitters like oil & gas, but with plans to discuss carbon pricing at COP26, this will become increasingly important for all businesses. This week the price of carbon on the UK Emissions Trading Scheme (UK ETS) is around £60 per tonne (~$82 USD), but the OECD estimates that to reach Net Zero by 2050, the price of carbon will need to rise to $147 USD per tonne by 2030. This will therefore significantly increase the value of emissions reductions for your businesses in the future.

“This week the price of carbon on the UK Emissions Trading Scheme (UK ETS) is around £60 per tonne (~$82 USD), but the OECD estimates that to reach Net Zero by 2050, the price of carbon will need to rise to $147 USD per tonne by 2030.”

Measuring and recording business GHG emissions was a difficult task when the Kyoto Protocol was first introduced. It is now an activity that many businesses choose to prioritise.

Accurate emissions measurement and reporting is set to become increasingly important for your business as the EU are now working on making it mandatory to measure your GHG baseline by 2023. We also expect non-financial disclosures to expand beyond emissions in the near future. Read our article on the EU regulations to find out more details on how to get ahead on this.

So what have we learned?

The Kyoto Protocol was an innovative piece of climate policy that kickstarted emissions management and pricing for certain business sectors, and that helped to reduce global emissions. Heading into COP26 in 2021, we can now expect the scope of these pieces to expand and further drive down corporate emissions.

The Protocol set the scene for the Paris Agreement of 2015, which will be discussed later in our Short History of COP series. Follow us on Medium to be notified when these articles are published.

For feedback on this article or questions related to how your organisation should approach sustainable reporting, drop us a line at insights@altruistiq.com.

Altruistiq is a sustainability SaaS and helps some of the world’s largest companies to sustainably sell more, spend less, and save time.

Emily Boothroyd

Insights Analyst