Linkage and Multilevel Governance

INTRODUCTION Most analysts assume that a unitary decisionmaker creates and enforces an emissions trading program. (1) This article, however, shows that environmental benefit trading under the Kyoto Protocol (2) depends heavily on a complex multi-jurisdictional architecture. (3) And it explores some of this architecture's implications for the ongoing effort to use an environmental benefit trading approach, conventionally seen as a property rights approach, to protect the atmospheric commons. (4) This article begins by showing that the Kyoto Protocol does not create individual property rights at the global level, at least not directly. Instead, it provides a framework that distributes authority to create and enforce property rights to international, regional, national, sub-national, and even private entities. (5) Because of this architecture, efforts to create an international market in order to maximize cost savings and liquidity come not from a global assignment of property rights, but from efforts by numerous regulators to "link" disparate regional, national, and sub-national trading programs. The article's second part analyzes some of the implications of this distribution of authority for the linking project. It discusses some enforcement concerns arising from this architecture that raise questions about whether Kyoto Protocol style trading is capable of delivering technology transfer, or instead, simply gives up emission reductions without obtaining any meaningful additional technology transfer. This problem has led to some restrictions on free trade of credits designed to combat what might be broadly described as emissions fraud. (6) The number of actors empowered to create such rules suggests that the rules addressing the problem will likely become numerous, varying, and complex. (7) The third part of the article reviews some policy options for addressing the problems of excessive complexity in trading markets. It argues that recommendations to simply reduce transaction costs are overly simplistic, as transaction costs are necessary to pay for fraud detection. Instead, it suggests rethinking the automatic acceptance of linking and supplementing trading with measures to stimulate needed innovation. The article concludes that a property rights regime can contribute to addressing global warming. But the global trading of credits does little to spur innovation and puts the realization of a cap at risk. For this reason, it may be wiser to restrict or even eliminate linkages between programs with caps and programs offering credits from uncapped sectors, such as the Clean Development Mechanism. I. KYOTO'S MULTILEVEL GOVERNANCE STRUCTURE In the past, many international agreements have limited the pollution coming from the countries involved without specifying the mechanisms for limiting pollution. (8) It would be possible to craft a climate change agreement that established reduction targets for national governments, but said nothing about how they should achieve these targets. (9) Such an approach would leave countries quite free to choose between traditional regulation, emissions trading, pollution taxes, and even voluntary approaches, as long as the countries met their internationally agreed upon goals. (10) The parties to the Kyoto Protocol, however, decided to address the instrument choice issue in the international agreement itself, rather than only on the national level. (11) As a result, the Kyoto Protocol authorizes no less than three emissions trading programs, allowing developed countries to purchase credits from developing countries through the Clean Development Mechanism (CDM), from Eastern Europe and the former Soviet Union through the Joint Implementation Program (JI), and from other developed countries with reduction obligations under the Kyoto Protocol. (12) The big advantage of this global approach, however fragmented, is that it allows for global trading of emission reduction credits. …