This paper examines emissions trading as a market-based mechanism for achieving greenhouse gas (GHG) reduction targets established under the Kyoto Protocol. It explains how emissions trading programs work — including permit allocation, trading, and the gradual tightening of caps — and reviews the progress of several nations and regions, including the European Union, Norway, Denmark, the United Kingdom, the Netherlands, Canada, Germany, and the United States. The paper argues that emissions trading offers a cost-effective pathway to emission reductions while incentivizing investment in cleaner technologies, and concludes that international cooperation through such mechanisms is essential for environmental and economic progress.
The global problem of climate change is becoming increasingly apparent as populations and economies grow worldwide. The build-up of greenhouse gases (GHGs) in the atmosphere is cited as a prominent cause of climate change. There is a correlation between elevated concentrations of GHGs in the atmosphere — especially carbon dioxide (CO2) — and global warming, which leads to extreme weather events such as droughts, floods, and the melting of polar ice caps.
There is international recognition of the immediate need to reduce GHGs and remedy the problem of global warming. The Kyoto Protocol was established in December 1997 as an agreement between over 160 countries to set targets for the reduction of GHGs and to determine available options for achieving them. The Protocol includes three Kyoto Mechanisms — market-based instruments that enable nations to buy or earn credits on an international scale. These mechanisms are the Clean Development Mechanism, Joint Implementation, and International Emissions Trading (IET). Developed countries that have accepted a Kyoto target are developing emissions trading programs in order to achieve these targets in a cost-effective manner.
In emissions trading, firms or organizations can buy or sell permits for emissions, or credits for reductions of emissions, of particular pollutants. Emissions trading requires that many buyers and sellers congregate to trade the commodities of emissions allowances or emissions reduction credits. International Emissions Trading is considered to be a significant method of minimizing the overall costs involved in the reduction of GHGs.
Upon commencement of an emissions trading program, parties are allocated a certain amount of emissions, and governments may either auction these permits or provide them for free. The total sum of permits available corresponds directly to the nation's emissions reduction targets. Parties that successfully reduce emissions below permitted levels may sell unused permits to parties that have not reduced emissions below permitted levels. In some cases, it may be more cost-effective for parties to initially purchase unused permits rather than investing in new technology necessary to reduce emissions.
Over time, governments reduce the number of permits available, and the market for auctioned or unused permits becomes increasingly costly. Parties therefore recognize that investment in clean-up technologies is more feasible than purchasing permits for emissions. During this process, emissions are reduced, and parties that successfully reduce emissions do not need to purchase auctioned permits and in fact profit from the sale of unused permits. The option of emissions trading also gives parties time to update their operations and invest in clean technologies. Evidence from emissions trading programs implemented in the United States indicates that this mechanism is an effective, cost-effective means of reducing emissions.
Nations throughout the world are taking steps to develop effective emissions trading programs that are compatible with the International Trading rules under the Kyoto Protocol. These programs are designed to aid in the achievement of established emissions reduction targets.
"EU, Norway, Denmark, UK, Netherlands, Canada, Germany programs"
"US opposes Kyoto but pursues state-level trading schemes"
On a global scale, governments are recognizing the urgent need to design and implement programs that will aid in GHG emission reduction. Emissions trading programs will enable countries to achieve established emission reduction targets in a cost-effective manner and will encourage companies to emit less and invest in cleaner technologies. The future of the environment depends on efforts such as these, in which nations come together to collectively address this international problem. Achieving targets set out under the Kyoto Protocol will ultimately improve international business and relations as various nations work together to establish a cleaner, more efficient means of conduct.
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