Defining the Principles , Modalities , Rules and Guidelines for Verification , Reporting

* The views expressed in this report are those of the authors and do not necessarily reflect those of the UNCTAD secretariat. Introduction The Kyoto Protocol authorizes four cooperative implementation mechanisms. These include bubbles, emission trades, joint implementation and the Clean Development Mechanism. Emissions trading, the focus of this report, allows trading of Òassigned amountsÓ among Annex B. nations. Authorized by Article 17 this provision leaves the crafting of implementation details to subsequent conferences. Three distinct trading possibilities emerge from this authorization: trading among countries with domestic emissions trading systems, trading among countries without domestic trading systems and trading among countries with and without domestic emission trading systems. The case for a tradable entitlements system is based on the advantages that it would offer compared to other politically feasible alternatives. In the short run it offers the possibility of reaching the environmental goals at a lower cost than would be possible if each country were limited to reduction options within its own borders. Making it easier to reach the goals may allow more countries to join the Protocol and usually increases compliance with those goals. Because it separates the issue of who pays for control from who implements control, it facilitates transboundary cost sharing (an item of particular importance to both the developing countries and the transition economies of Eastern Europe). Tradable permits also facilitate the mobilization of private capital for controlling global warming; private capital is likely to be a critically important component of any effective global warming strategy as long as public capital remains insufficient to do it alone. Finally, and perhaps most importantly, tradable entitlements facilitate the development and implementation of novel approaches to climate change control. By offering greater flexibility in how the emission reductions are achieved (as well as by providing economic incentives for the adoption and use of unconventional approaches), tradable entitlements can significantly lower the long run cost. Lower long run cost may be an important element in gaining greater international acceptance of the idea of limits and reducing the difficulties associated with assuring compliance. Furthrmore if it becomes desirable to assure that participants cover the administrative costs of running the system, levying a low annual fee on each entitlement could raise revenue. This revenue could be used for financing technology transfers or for other worthy purposes without jeopardizing the cost-effectiveness of the system. Previous emission trading programs have taken one of two …