Understanding the Design and Performance of Emissions Trading Systems for Greenhouse Gas Emissions

Discussion papers are research materials circulated by their authors for purposes of information and discussion. They have not necessarily undergone formal peer review or editorial treatment. Michael Toman, Resources for the Future ([email protected]) This " digital monograph " is based on a workshop we organized at Resources for the Future in 1999 to bring together a variety of experts to refine a list of priority research questions on greenhouse gas (GHG) emissions trading. The workshop sought to (1) highlight the state of knowledge regarding greenhouse gas emissions trading, (2) help stimulate synergy among researchers with different specialties, and (3) provide a resource for funders and users of research on greenhouse gas control options when setting their own priorities. The papers in this proceedings were prepared after the workshop based on presentations made there. Rather than divide the workshop program by type of policy mechanism, we divided the program into three methodological categories that span all the flexibility mechanisms. These categories are theoretical/legal/institutional issues, modeling, and experimental approaches. The papers included in the proceedings address each of these topic areas. Economists and policy analysts have long been interested in how to design and implement an emission trading system to reduce greenhouse gases efficiently, both domestically and internationally. In the wake of negotiations for the Kyoto Protocol, interest in the properties and implications of emissions trading has spread rapidly to governmental decisionmakers and other important stakeholders in the climate change arena. As more and more people take a hard look at emissions trading, numerous questions needing reliable answers have emerged. While no confusion exists about the basic principles behind emissions trading as an incentive-based, cost-effective policy tool, decisionmakers must address many unexplored specifics as to how GHG emissions trading would be designed and would perform in practice. For example: • Where in the energy system can emissions trading be implemented in practice? • What is the role of governments vis-à-vis private actors in international trading? What kinds of institutions –(i.e., clearinghouses and scorekeeping) need to be developed, and who should develop them? How do the answers differ when considering trading among " Annex B " industrialized countries and creating carbon credits through activities in non-Annex B developing countries via the Clean Development Mechanism (CDM)? 2 • How does one deal with the nettlesome issues of defining credible baselines and additionality for CDM transactions, given imperfect contracts and enforcement and the potential for …