Industrialized countries must first and foremost take domestic action against climate change, but the Protocol provided a certain degree of flexibility by allowing Annex I countries to achieve their mitigation commitments through three innovative mechanisms. The three Kyoto mechanisms are: Joint Implementation (JI), the Clean Development Mechanism (CDM) and Emissions Trading (ET), included in Articles 6, 12 and 17 respectively. While Emissions Trading is purely a market-based instrument, JI and CDM are the two project-based mechanisms which feed the carbon market. Although the Protocol laid down basic provisions on the mechanisms, the detailed rules and modalities for the mechanisms to be implemented were subsequently agreed upon by Kyoto Protocol Parties on later stages as part of the Marrakesh Accords. Parties should meet eligibility criteria to be able to take part in all three mechanisms.
Clean Development Mechanism (CDM): Defined under Article 12 of the Protocol, CDM projects involve Annex I Parties and non-Annex I Parties. The mechanism allows a Party with an emission limitation or reduction commitment under the Kyoto Protocol (Annex B Party) to implement an emission-reduction project in developing countries. Such projects can earn saleable certified emission reduction (CER) credits, each equivalent to one tone of CO2, which can be counted towards meeting Kyoto target of the investing Annex I Party. The purpose of the CDM is twofold: 1) to assist non-Annex I Parties (host countries) in achieving sustainable development; and 2) to assist Annex I Parties in meeting their emission reduction obligations under the Kyoto Protocol.
Emissions Trading (ET): As a market-based mechanism, ET is the trading of assigned amount units (AAUs) between two Annex I countries. In accordance with Article 12, Parties with emissions limitation or reduction commitment under the Kyoto Protocol (Annex B Parties) can acquire emission units from other Parties with commitments under the Protocol and use them towards meeting a part of their targets. An international transaction log, a software-based accounting system, ensures secure transfer of emission reduction units between countries. An Annex I Party must meet specific eligibility requirements to participate in emissions trading.