Global warming is the increase in the average temperature of the oceans and the atmosphere. The scientific community has now agreed that human activities have caused global warming and the other climatic problems that go along with it.

In February 2007, a new report by the Intergovernmental Panel on Climate Change (IPCC) concluded that the increase of the planet’s average temperature since the middle of the 20th century is due to the observed increase of greenhouse gases created by man. The rate of certainty of this theory is above 90%, up from only 66% in 2001.

To combat this phenomenon, two major agreements have been adopted by the international community – United Nations Framework Convention on Climate Change (UNFCCC), which came into effect on March 21, 1994 and the Kyoto Protocol, which came into force on February 16, 2005.

In order to stabilize the concentration of greenhouse gases in the atmosphere, thereby preventing any further climatic disturbances by man, the Kyoto Protocol established a system whereby greenhouse quotas can be commercially exchanged and provided two other flexible mechanisms – Joint Implementation (JI) and the Clean Development Mechanism (CDM).

The Clean Development Mechanism (CDM), set out in article 12 of the Kyoto Protocol, allows private companies in industrialised countries to implement projects to reduce the emission of greenhouse gases in developing countries. In return, these private companies then receive certified emission reduction units (CERs), commonly known as “carbon credits”, issued by the United Nations (UN).

Each carbon credit corresponds to the reduction of one ton of CO2 in the atmosphere. They may be sold in the international market to companies that fail to achieve the greenhouse gas emission reduction objectives that have been imposed by their governments. Carbon credits are issued mostly by countries that have ratified the Kyoto Protocol and have put in place various binding measures that compel companies to respect their undertakings.

This system provides a useful tool to companies that cannot attain their gas reduction objectives. In the European model prepared for 2008 to 2012, any operator that defaults on its objectives may be liable for a fine of 100 euros per ton of CO2.By providing the possibility of exchanging carbon credits, companies can compensate for their shortfall and therefore avoid fines which may be imposed upon them.

Companies that develop a CDM project can reap considerable benefits. Not only can they generate income through the project itself, these companies are also granted a number of emission reduction certificates (carbon credits) by a competent authority. These certificates can then be sold at market value or be kept as assets.

The CDM is aimed at promoting sustainable development in the least developed countries, enabling them to achieve some of their economic goals and address social and environmental concerns, while allowing developed countries to help reduce concentrations of greenhouse gases (GHG) emitted into the atmosphere. Remember that there are six GHGs eligible: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydro fluorocarbon (HFCs), per fluorocarbons (PFCs) and sulphur hexafluoride (SF6).

In reality, the Kyoto Protocol uses economic mechanisms for the betterment of the global environment.

The implementation of this system provides astonishing results. Since the Kyoto Protocol came into effect in February 2005, there has been significant growth in the carbon market. The World Bank estimated the value of the carbon market at US$10.9 billion in 2005, US$30.1 billion in 2006 and US$64 billion in 2007.

According to Point Carbon – a research firm established in Oslo that specializes in carbon markets – the global carbon market could reach US$565 billion by 2020.

As for "carbon credits" generated by CDM projects, they accounted for 17% of the credits negotiated in the global carbon market in 2006. Through CDM projects, over 475 million tons of carbon dioxide equivalent have not reached the atmosphere.

In addition, those CDM projects generated more than US$5 billion in CERs for their promoters in 2006, and over US$17 billion in 2007, which demonstrates an outstanding growth profile for this market.