Markets for Tradable Carbon Dioxide Emission Quotas: Principles and Practice

This chapter reviews a range of issues relating to tradable carbon dioxide (CO2) emission quotas (TEQs). It considers the economic principles on which they are based, compares them with alternative carbon abatement policies, and reviews many aspects of how tradable quotas would be implemented in practice. Section 2.2 sets the scene, explaining why these issues are on the agenda and how they relate to current issues, such as joint implementation. The principal alternative to a TEQ regime is the adoption of carbon taxes. Section 2.3 compares salient aspects of the two policy approaches. It also analyzes how they can be combined. Section 2.4 studies a particular and very important aspect of a TEQ regime: the allocation of TEQs among participating countries. These two sections present the key theoretical perspectives on tradable quotas and their main alternative: carbon taxes. Section 2.5 addresses issues connected with the implementation of TEQs, analyzing questions associated with the design and management of a TEQ market.