Regulated vs Voluntary Carbon Markets The Kyoto Protocol: Regulated Market Requirements The Kyoto Protocol is a legally-binding agreement under which 169 industrialized countries have agreed to reduce their collective greenhouse gas emissions (GHG) to a level that is 5.4% below their 1990 emission levels by 2012. It came into effect in 2005, and had been ratified by 169 countries as of late 2006. It is under the Kyoto regime that the world’s largest GHG market has evolved. This market is based on a cap-and-trade model with three major “flexibility mechanisms”: Emissions Trading, Joint Implementation and the Clean Development Mechanism. These mechanisms are the foundation of the regulated international Kyoto carbon market: Emissions Trading is an allowance-based transaction system that enables developed countries and countries with economies in transition to purchase carbon credits from other developed countries and economies in transition to fulfill their emissions reductions commitments. The mechanism has resulted in the European Union Emission Trading Scheme (EU ETS), which involves all EU member states and is the currently the worlds largest multi-national GHG emissions trading scheme. Credits traded under the system are called European Union Allowance (EUAs). Joint Implementation (JI) allows emitters in developed countries (referred to as Annex 1 countries under the Kyoto Protocol) to purchase carbon credits via “project-based” transactions (meaning from greenhouse gas reduction projects) implemented in either another developed country or in a country with an economy in transition. Emissions from these JI projects are referred to as Emission Reduction Units (ERUs). The Clean Development Mechanism (CDM), like JI, is a project-based transaction system through which industrialized countries can accrue carbon credits. Unlike JI, however, CDM credits are acquired by financing carbon reduction projects in developing countries. Carbon offsets originating from registered and approved CDM projects are called Certified Emissions Reductions (CERs). This mechanism is the critical link between developed and developing countries under Kyoto and is the flexible mechanism participants in the voluntary market most often seek to emulate. Accepted CDM projects have become a major influence on ‘setting the bar’ for offset projects in developing countries. CERs and ERUs can also be sold on the voluntary markets. In 2006, the CDM transacted credits valued at around US$5 billion and representing reductions of 450 MtCO2e. The United States did not ratify Kyoto, and the federal government does not currently regulate carbon dioxide (CO2) or other Kyoto GHGs as climate change-related pollutants. Having ratified the Montreal Protocol, the US does regulate ozone depleting GHGs, such as Chlorofluorocarbons (CFCs), which are internationally being phased out entirely. To compensate for the lack of national CO2 regulation, several  states have initiated  their own regulatory processes, alone or in conjunction with others.