Institutional and legal issues of emissions trading

Emissions trading systems as a means of air pollution control have been developed in recent years to address some important limitations of traditional command and control environmental regulation. Trading systems address many of the inefficiencies of command systems and may promote cost-effectiveness by introducing flexibility and providing incentives for sources with lower control costs to undertake more of the control burden. In the United States, for example, experience demonstrates that emissions trading systems for diffuse air pollutants can work effectively to protect the environment, provide desirable flexibility in the means of control, stimulate environment-friendly innovation and achieve very significant cost savings if such systems are properly designed and enforced. Successful U.S. programs have included trading systems to eliminate lead in gasoline, reduce sulfur dioxide emissions by 50%, reduce smog in Los Angeles, phase out chemicals that deplete stratospheric ozone, and provide flexibility in air pollution regulation generally. Emissions trading systems are especially well suited to addressing climate change because they achieve limitations of net greenhouse gas emissions at far less cost and stimulate innovation along environmentally friendly paths to sustainable development. Because greenhouse gas emissions mix globally,net reductions of greenhouse gas emissions provide the same environmental benefit regardless of where on the globe they occur. The flexibility afforded by trading systems thus allows emissions reduction and sequestration activities to occur wherever greenhouse gas limitations can be accomplished at least cost. In recognition of these advantages, the Kyoto Protocol authorizes emissions trading among Annex I countries, as well as between Annex I countries and developing countries through the Clean Development Mechanism ( cdm). Reducing the costs of achieving limitations may promote the likelihood of successful international agreement on and implementation of more ambitious limitations measures. Equally important, the cdm can provide important economic and environmental benefits for developing countries by channeling additional public and private sector investment capital from the developed countries into sustainable development in developing countries. This paper starts with an explanation of the basic features of emissions trading systems. It then reviews the successful domestic use of trading systems in the United States. Finally, it discusses the international use of emissions trading to mitigate climate change, including Annex I trading and trading under the cdm. 230    