The United Nations Framework Convention on Climate Change was entered into force by most countries in 1994 to cope with the global warming problem which had been believed to be caused by GHG emissions from various industries. The Kyoto Protocol is an addition to the treaty and the Protocol's clean development machnism (CDM) is becoming the largest market-based mechanism which has more powerful (and legally binding) measures. It is estimated that emission reduction purchase agreements (ERPAs) corresponding to 397 Mt CO2e were entered into in 2005 under CDM.
The Kyoto Protocol officially became a legally binding treaty on February 16, 2005 and as of April 2006, 163 countries have ratified the Protocol. Purpose of the Protocol is to reduce GHG emissions. Developed countries ( referred to in treaty terminology as Annex A countries) are obliged to reduce their collective emissions by 5.2% during 2008-2012; emission credits obtained from 2000 to 2008 can be used to achieve compliance. China ratified the Protocol in August 2002 but with no binding obligations to meet emission reduction targets ( India and Brazil also gained the exemption as they are also referred to in treaty terminology as Annex B countries). USA , the world's largest emitter, and Australia are noteworthy for being the only major industrialised countries not to ratify Kyoto .
The carbon market can be explained as the market resulting from buying and selling of emission allowances and reduction credits in order to enable countries and companies meet their GHG emission targets under international treaties. Another way of looking at it is that it introduces a price for carbon - placing a cost on emissions and a value on reductions.
While the Kyoto Protocol does not impose emission reduction commitments on developing countries, they play a crucial role in the international carbon market. Countries, and also companies, can invest in emission reduction projects in non-Annex A countries and receive carbon credits in return for the resulting reductions. Developing countries are indeed already participating in a meaningful way.
