A Survey of Current Issues
New Horizons in Environmental Economics series
Edited by Tom Tietenberg and Henk Folmer
Suzi Kerr and Catherine Leining* 1. INTRODUCTION The textbook economists’ model of a tradable permit system cannot usually be applied perfectly at either the domestic or international scale because of the difficulty and/or expense of defining allocations to and monitoring emissions of some groups, as well as for political reasons.1 It may be impossible to bring these groups fully into a tradable permit system but it is often possible to find compromise solutions to gain some benefits from trade: lower costs of achieving the environmental outcome, greater engagement of actors in the overall process, and greater equity by allowing all groups to gain some benefit. A variety of compromise trading models suit different circumstances. The Kyoto Protocol limits greenhouse gas emissions in the Annex B2 (developed) countries that ratify it. To reduce the costs of achieving the overall emission limits, three trading mechanisms are available: international emissions trading; joint implementation; and the clean development mechanism. They all ultimately transfer units that can be used for compliance but they are available to different groups in different time periods and have different rules.3 The two key distinctions are first, between Annex B (developed countries) and non-Annex B (developing countries), and second, based on the quality of domestic emissions monitoring. Only countries that have ratified Kyoto can participate. Under all mechanisms, trading can be carried out either by the government, or by legal entities (companies or individuals) where the government devolves this authority. The government remains ultimately responsible for compliance. International emissions trading...
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