CHARACTERISTICS

Concern over the costs and benefits of reducing GHG emissions has been one of the most, if not the most, important factor in discussion about climate change mitigation. Many parties make the argument that, since the atmosphere does not care where reductions of greenhouse gases are made, it makes economic sense to make reductions where they are the "least cost". In many instances, low-cost project opportunities exist in developing countries, but it is industrialized countries that have the capital needed to undertake the projects.

Emissions trading is one of the market-based mechanisms promoted in international negotiations. Facilitating emission trades assures the completion and fruition of a greater number of projects to reduce emissions. Through this action, capital and technology flow could be enhanced. However, there are several data and administrative actions required to facilitate establishment of a viable emission trade. These actions include (but are not limited to) verifiability, cost-effectiveness, maintenance, monitoring and liability.

SIZE:
Any number of trades are possible. There may be a limit on number of reductions that a country can purchase through trades instead of taking domestic action to meet its total commitment.

FEATURES:
Potential bilateral (Activities Implemented Jointly or Joint Implementation) or through multi-lateral mechanisms.

COST:
Vary depending on limitations placed on trades (e.g., cap on purchases by country), and on share of project cost that is attributable to transaction/administrative costs.

CURRENT USAGE:
Russia/Japan; Costa Rica /U.S., Canada/U.S.

POTENTIAL USAGE:
Could be used internationally, depending on final rules approved by UNFCCC, but each country may have a limit on the share of allowances that could be used for compliance.

CLIMATE CHANGE IMPACT

EMISSION EFFECT:
    

CONDITIONS FOR EMISSIONS MITIGATION:

• All reductions must be verified.

EMISSION ESTIMATE:
N/A

COST-EFFECTIVENESS:
Will vary with each project, but the premise of emissions trading is that projects will take place where it is most cost-effective.

SECONDARY EFFECTS:
Where fossil fuel use is reduced, the associated emissions of sulfur dioxide and nitrogen oxide will also be reduced.

ISSUES ASSOCIATED WITH IMPLEMENTING ACTION

• Many issues remain unresolved; negotiations are in process to work out internationally acceptable terms.
• It is the position of the United States that no limit on trading should be imposed as that would negatively affect the flexibility of the market to function. Analysis by the Clinton Administration reveals that the U.S. expects to meet as much as 85% of the reductions committed to through trading of emissions permits on a worldwide market.
• It is the position of the European Union that a limit on the percentage of allowable trades should be set to insure that countries take domestic actions to reduce their emissions.

RESOURCES

• Resources for the Future offers several articles explaining the mechanics of emissions trading at http://www.weathervane.rff.org.

CONTACTS

Emissions Marketing Association
Daniel Chartier
Milwaukee, WI
Tel: (414) 276-3819
Fax: (414) 276-3349
http://www.emissions.org

Environmental Financial Products Ltd.
Michael Walsh
Senior Vice President
Chicago, IL
Tel: (312) 554-3380
Fax: (312) 554-3373

United Nations Conference on Trade and Development (UNCTAD)
Frank Joshua
Geneva, Switzerland
Tel: +41-22-917-5834
Fax: +41-22-907-0274
frankjoshua@unctad.org

World Bank Carbon Investment Fund
Eivind Tandberg
Director, Carbon Offsets Unit
Washington, DC
Tel: (202) 473-9746