Emissions Trading "A basic principle Economics comparative advantage: a country produces goods producing, bad. The traditional story includes relative endowments capital labor, capital intensity goods matters. Now add environmental externalities.

Comparative advantage in emissions trading: The environment and economics

Although it was not signed by the United States, at the time of its drafting, the Kyoto Protocol was considered a major advancement in attempts to curb global warming by limiting emissions. However, the international agreement also brought the controversial practice of emissions trading of pollutions credits to the forefront of the concerns of the world environmental movement. "Emissions trading, as set out in Article 17 of the Kyoto Protocol, allows countries that have emission units to spare - emissions permitted them but not 'used' - to sell this excess capacity to countries that are over their targets" (International emissions trading, 2013, Kyoto). In other words, 'cleaner' nations could sell their credits to dirtier nations, thus preserving the environmental status quo.

From an economic perspective, nations that...

The HOS trade theory concept of efficient economic comparative advantage where, say, one nation that is warm produces more oranges efficiently and sells them to a colder nation that cannot produce oranges equally efficiently, is not true of environmental 'trading' in the same way, since the ultimate aim of Kyoto was parity in reductions efforts. There have been some aims to contain the tendency to 'trade down' "In order to address the concern that Parties could 'oversell' units, and subsequently be unable to meet their own emissions targets, each Party is required to maintain a reserve of ERUs, CERs, AAUs and/or RMUs in its national registry. This reserve, known as the 'commitment period reserve,' should not drop below 90 per cent of the Party's assigned amount or 100 per cent of five times its most recently reviewed inventory, whichever is lowest" (International emissions trading, 2013, Kyoto).
Advocates of emissions trading, however, state that it is merely a preventative 'stop gap' measure to enable less developed nations to 'catch up' to other nations. "A global carbon price gives birth to a new commodity, and a new set of investment and financing opportunities. These opportunities can link the metrics and methods for GHG abatement with larger capital markets flows aimed…