Climate change caused by Green House gas (GHG) emissions is one of the most serious threats facing the world today. Achieving substantial reductions in global GHG emissions will require a concerted international effort involving governments and corporations acting under international treaties as well as independent action by businesses and individuals prepared to take responsibility for their own GHG footprint. In addition to direct reductions of greenhouse gas emissions at source, a supplementary option is to contribute to activities that reduce greenhouse gas emissions elsewhere by acquiring emission reduction credits from these projects.

The international political response to climate change began with the United Nations Framework Convention on Climate Change (UNFCCC) adopted in 1992. Designed to raise awareness and build knowledge about the challenges and barriers faced by climate change mitigation, the UNFCCC set out a framework for action aimed at stabilising atmospheric concentrations of greenhouse gases to prevent dangerous human interference with the climate system. The Kyoto Protocol to the Convention, which was adopted in 1997 by more than 170 countries, significantly strengthened the UNFCCC by committing many industrialised countries and economies in transition, the so-called "Annex 1 countries", to individual, legally-binding targets to limit or reduce their overall emissions of greenhouse gases by at least 5% below the 11000px levels of emission during the period 2008-2012.

In addition to setting the first ever international target for reducing greenhouse gas emissions, the Kyoto Protocol established, for the first time, a means for developing countries to get involved in climate change mitigation, enabling a market-based solution to an environmental problem and bringing the issue of greenhouse gases to the mainstream of clean energy planning.

The Kyoto Protocol approved the use of 3 "flexible mechanisms" for facilitating the achievement of its GHG emission reduction targets. These are:

1) Emissions Trading: allowing the international transfer of national allocations of emission rights, between different Annex 1 countries;

2) The Clean Development Mechanism (CDM): a mechanism which allows for the creation of Certified Emission Reduction (CER) credits through emission reduction projects in developing countries, regulated by the CDM Executive Board;

3) Joint Implementation: the creation of emissions reduction credits undertaken through transnational investment between countries and/or companies of the Annex 1 (industrialised countries).

The rationale behind these three mechanisms is that climate change is a global problem and that the location of the greenhouse gas emission reductions is irrelevant in scientific terms, and can thus be in any country.

While emission reductions generated by these three flexible mechanisms have different technical names dependant on which mechanism they arise from, they are collectively referred to as "carbon credits". Carbon credits are measured in tonnes of carbon dioxide equivalent (tCO2e) . One carbon credit represents one tonne of CO2e non-emitted or reduced. These three flexible mechanisms, along with the European Union Trading Scheme (EU ETS) put in place by the European Union in order to meet its Kyoto target, created the largest environmental market in the world for the trading of these carbon credits.

The voluntary markets

In Voluntary Carbon Markets, activities that reduce GHGs produce verified emission reductions (VERs) that can be sold to  companies or individuals wishing to voluntarily reduce their carbon footprints. GHG emission reduction projects developed under the Kyoto Protocol's Clean Development Mechanism (CDM) have been highly successful in reducing emissions and generating Certified Emission Reductions (CERs), which are then purchased by governments and organisations in Europe and Japan to help meet their emission reduction targets. Although voluntary reductions are similar to regulated credits, they are different in some important ways.

VERs can be generated from projects which:
  • are either based in a country that has not ratified the Kyoto Protocol or does not have the infrastructure to support CDM project development
  • have not yet been registered under the CDM
  • fall outside of the scope of the CDM
  • are too small to warrant the costs of CDM approval
  • are specifically developed for the voluntary market