Trading of Emission Reduction Commitments for Sulfur Dioxide in Europe

This paper analyzes the potential role of emission trading systems for non-uniformly dispersed air pollutants, for which the geographical location of emissions has a significant impact on the location and extent of environmental damage. The paper derives the necessary conditions for trading schemes to be cost-effective and introduces the concept of offset rates. Offset rates describe the amount of emissions one source has to decrease if another source increases its emissions by one unit. To explore the potential performance of alternative trading schemes a simulation framework based on' the IIASA-RAINS model has been developed. Simulation runs to achieve regionally specified maximum levels of sulfur deposition (target loads) in Europe show that trading may result in cost savings. The extent to which such cost savings are possible and whether the originally specified target deposition levels are exceeded, depends crucially on the pre-trade level of emissions, the availability of information on costs, and the behaviour of the trading partners. Further analysis is necessary before drawing final conclusions.