This paper has been developed with a view toward promoting trans-Atlantic dialogues on market mechanisms for environmental protection. While the overarching topic for dialogue is the full panoply of environmental problems for which market mechanisms may be considered, this paper is prepared in the context of increasing global attention to the problem of climate change. The November 1998 Buenos Aires Conference of the Parties to the United Nations Framework Convention on Climate Change provides an example of the international focus on market mechanisms among governments, the private sector, and non-governmental organizations around the world. This paper reviews market mechanisms for environmental protection, with special focus on emissions trading. Emissions trading programs place an overall limit on the amount of emissions that sources may emit, and then allow sources a degree of flexibility to determine where, when, and how to meet their total limits.
Compliance is determined solely by comparing actual emissions to allowable amounts.
Experience also indicates that when these elements are firmly in place, emissions trading programs can deliver powerful incentives to sources to innovate to develop more environmentally effective and more cost-effective ways of reducing emissions. Trading programs premised on these elements can achieve faster, deeper cuts in pollution, at far less cost than other regulatory instruments. The paper examines the Kyoto Protocol framework for an innovative international market in GHG emissions reductions. The Protocol places a legally binding limit on the allowable amount of GHG emissions from most industrialized countries for the period 2008-2012. It then affords these nations the opportunity to trade allowable amounts of emissions, either directly or in conjunction with joint emissions reduction projects.