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Main articles: "Garnaut Climate Change Review, "Carbon Pollution Reduction Scheme, and "Clean Energy Bill 2011

In 2003 the New South Wales (NSW) state government unilaterally established the NSW Greenhouse Gas Abatement Scheme[80] to reduce emissions by requiring electricity generators and large consumers to purchase NSW Greenhouse Abatement Certificates (NGACs). This has prompted the rollout of free energy-efficient compact fluorescent lightbulbs and other energy-efficiency measures, funded by the credits. This scheme has been criticised by the Centre for Energy and Environmental Markets (CEEM) of the "UNSW because of its lack of effectiveness in reducing emissions, its lack of transparency and its lack of verification of the additionality of emission reductions.[81]

Both the incumbent "Howard "Coalition government and the "Rudd "Labor opposition promised to implement an emissions trading scheme (ETS) before the "2007 federal election. Labor won the election, with the new government proceeding to implement an ETS. The government introduced the "Carbon Pollution Reduction Scheme, which the "Liberals supported with "Malcolm Turnbull as leader. "Tony Abbott questioned an ETS, saying the best way to reduce emissions is with a "simple tax".[82] Shortly before the carbon vote, Abbott defeated Turnbull in a leadership challenge, and from there on the Liberals opposed the ETS. This left the government unable to secure passage of the bill and it was subsequently withdrawn.

"Julia Gillard defeated Rudd in a leadership challenge and promised not to introduce a carbon tax, but would look to legislate a price on carbon [83] when taking the government to the "2010 election. In the first "hung parliament result in 70 years, the government required the support of crossbenchers including the "Greens. One requirement for Greens support was a carbon price, which Gillard proceeded with in forming a minority government. A fixed carbon price would proceed to a floating-price ETS within a few years under the plan. The fixed price lent itself to characterisation as a carbon tax and when the government proposed the "Clean Energy Bill in February 2011,[84] the opposition claimed it to be a broken election promise.[85]

The bill was passed by the "Lower House in October 2011[86] and the "Upper House in November 2011.[87] The Liberal Party vowed to overturn the bill if elected.[88] The bill thus resulted in passage of the Clean Energy Act, which possessed a great deal of flexibility in its design and uncertainty over its future.

The "Liberal/National coalition government elected in September 2013 has promised to reverse the climate legislation of the previous government.[89] In July 2014, the carbon tax was repealed as well as the Emissions Trading Scheme (ETS) that was to start in 2015.[90]

New Zealand[edit]

New Zealand Emissions Trading Scheme and "Climate change in New Zealand
New Zealand Unit Prices 2010 to 2015

The New Zealand Emissions Trading Scheme (NZ ETS) is a partial-coverage all-free allocation uncapped highly internationally linked emissions trading scheme. The NZ ETS was first legislated in the "Climate Change Response (Emissions Trading) Amendment Act 2008 in September 2008 under the "Fifth Labour Government of New Zealand[91][92] and then amended in November 2009[93] and in November 2012[94] by the "Fifth National Government of New Zealand.

The NZ ETS covers forestry (a net sink), energy (43.4% of total 2010 emissions), industry (6.7% of total 2010 emissions) and waste (2.8% of total 2010 emissions) but not pastoral agriculture (47% of 2010 total emissions).[95] Participants in the NZ ETS must surrender two emissions units (either an international 'Kyoto' unit or a New Zealand-issued unit) for every three tonnes of carbon dioxide equivalent emissions reported or they may choose to buy NZ units from the government at a fixed price of NZ$25.[96]

Individual sectors of the economy have different entry dates when their obligations to report emissions and surrender emission units take effect. Forestry, which contributed net removals of 17.5 "Mts of "CO2e in 2010 (19% of NZ's 2008 emissions,[97]) entered the NZ ETS on 1 January 2008.[98] The stationary energy, industrial processes and liquid fossil fuel sectors entered the NZ ETS on 1 July 2010. The waste sector (landfill operators) entered on 1 January 2013.[99] Methane and nitrous oxide emissions from pastoral agriculture are not included in the NZ ETS. (From November 2009, agriculture was to enter the NZ ETS on 1 January 2015[96])

The NZ ETS is highly linked to international carbon markets as it allows the importing of most of the "Kyoto Protocol emission units. However, as of June 2015, the scheme will effectively transition into a domestic scheme, with restricted access to international Kyoto units (CERs, ERUs and RMUs).[100] The NZ ETS has a domestic unit; the 'New Zealand Unit' (NZU), which is issued by free allocation to emitters, with no auctions intended in the short term.[101] Free allocation of NZUs varies between sectors. The commercial fishery sector (who are not participants) have a free allocation of units on a historic basis.[96] Owners of pre-1990 forests have received a fixed free allocation of units.[98] Free allocation to emissions-intensive industry,[102][103] is provided on an output-intensity basis. For this sector, there is no set limit on the number of units that may be allocated.[104] The number of units allocated to eligible emitters is based on the average emissions per unit of output within a defined 'activity'.[105] Bertram and Terry (2010, p 16) state that as the NZ ETS does not 'cap' emissions, the NZ ETS is not a cap and trade scheme as understood in the economics literature.[106]

Some stakeholders have criticized the New Zealand Emissions Trading Scheme for its generous free allocations of emission units and the lack of a carbon price signal (the "Parliamentary Commissioner for the Environment),[107] and for being ineffective in reducing emissions ("Greenpeace Aotearoa New Zealand).[108]

The NZ ETS was reviewed in late 2011 by an independent panel, which reported to the Government and public in September 2011.[109]

European Union[edit]

European Union Emission Trading Scheme

The European Union Emission Trading Scheme (or EU ETS) is the largest multi-national, greenhouse gas emissions trading scheme in the world. It is one of the EU's central policy instruments to meet their cap set in the Kyoto Protocol.[110]

After voluntary "trials in the UK and Denmark, Phase I began operation in January 2005 with all 15 member states of the "European Union participating.[111] The program caps the amount of carbon dioxide that can be emitted from large installations with a net heat supply in excess of 20 MW, such as power plants and carbon intensive factories[112] and covers almost half (46%) of the EU's Carbon Dioxide emissions.[113] Phase I permits participants to trade among themselves and in validated credits from the developing world through Kyoto's "Clean Development Mechanism. Credits are gained by investing in clean technologies and low-carbon solutions, and by certain types of emission-saving projects around the world to cover a proportion of their emissions.[114]

During Phases I and II, allowances for emissions have typically been given free to firms, which has resulted in them getting windfall profits.[115] Ellerman and Buchner (2008) suggested that during its first two years in operation, the "EU ETS turned an expected increase in emissions of 1%-2% per year into a small absolute decline. Grubb et al. (2009) suggested that a reasonable estimate for the emissions cut achieved during its first two years of operation was 50-100 MtCO2 per year, or 2.5%-5%.[116]

A number of design flaws have limited the effectiveness of the scheme.[110] In the initial 2005-07 period, emission caps were not tight enough to drive a significant reduction in emissions.[115] The total allocation of allowances turned out to exceed actual emissions. This drove the carbon price down to zero in 2007. This oversupply was caused because the allocation of allowances by the EU was based on emissions data from the European Environmental Agency in Copenhagen, which uses a horizontal activity-based emissions definition similar to the United Nations, the EU ETS Transaction log in Brussels, but a vertical installation-based emissions measurement system. This caused an oversupply of 200 million tonnes (10% of market) in the EU ETS in the first phase and collapsing prices.[117]

Phase II saw some tightening, but the use of JI and CDM offsets was allowed, with the result that no reductions in the EU will be required to meet the Phase II cap.[115] For Phase II, the cap is expected to result in an emissions reduction in 2010 of about 2.4% compared to expected emissions without the cap (business-as-usual emissions).[110] For Phase III (2013–20), the "European Commission proposed a number of changes, including:

In January 2008, Norway, Iceland, and Liechtenstein joined the European Union Emissions Trading System ("EU ETS), according to a publication from the "European Commission.[118] The "Norwegian Ministry of the Environment has also released its draft National Allocation Plan which provides a carbon cap-and-trade of 15 million metric tonnes of CO2, 8 million of which are set to be auctioned.[119] According to the OECD Economic Survey of Norway 2010, the nation "has announced a target for 2008-12 10% below its commitment under the Kyoto Protocol and a 30% cut compared with 1990 by 2020."[120] In 2012, EU-15 emissions was 15.1% below their base year level. Based on figures for 2012 by the European Environment Agency, EU-15 emissions averaged 11.8% below base-year levels during the 2008-2012 period. This means the EU-15 over-achieved its first Kyoto target by a wide margin.[121]

Tokyo, Japan[edit]

Tokyo Metropolitan Government

The Japanese city of Tokyo is like a country in its own right in terms of its energy consumption and GDP. Tokyo consumes as much energy as "entire countries in Northern Europe, and its production matches the GNP of the world's 16th largest country". A scheme to limit carbon emissions launched in April 2010 covers the top 1,400 emitters in Tokyo, and is enforced and overseen by the Tokyo Metropolitan Government.[122][123] Phase 1, which is similar to Japan's scheme, ran until 2015. (Japan had an ineffective voluntary emissions reductions system for years,[124] but no nationwide cap-and-trade program.) Emitters must cut their emissions by 6% or 8% depending on the type of organization; from 2011, those who exceed their limits must buy matching allowances or invest in renewable-energy certificates or offset credits issued by smaller businesses or branch offices.[125] Polluters that fail to comply will be fined up to 500,000 yen plus credits for 1.3 times excess emissions.[126] In its fourth year, emissions were reduced by 23% compared to base-year emissions.[127] In phase 2, (FY2015-FY2019), the target is expected to increase to 15%-17%. The aim is to cut Tokyo's carbon emissions by 25% from 2000 levels by 2020.[125] These emission limits can be met by using technologies such as solar panels and advanced fuel-saving devices.[123]

United States[edit]

Climate change in the United States and "Acid Rain Program

An early example of an emission trading system has been the SO2 trading system under the framework of the "Acid Rain Program of the 1990 "Clean Air Act in the U.S. Under the program, which is essentially a cap-and-trade emissions trading system, SO2 emissions were reduced by 50% from 1980 levels by 2007.[128] Some experts argue that the cap-and-trade system of SO2 emissions reduction has reduced the cost of controlling acid rain by as much as 80% versus source-by-source reduction.[21][129] The SO2 program was challenged in 2004, which set in motion a series of events that led to the 2011 "Cross-State Air Pollution Rule (CSAPR). Under the CSAPR, the national SO2 trading program was replaced by four separate trading groups for SO2 and NOx.[130] California's cap-and-trade program ranks only second to the ETS (European Trading System) carbon market in the world.[131]

In 1997, the State of "Illinois adopted a trading program for "volatile organic compounds in most of the Chicago area, called the Emissions Reduction Market System.[132] Beginning in 2000, over 100 major sources of pollution in eight Illinois counties began trading pollution credits.

In 2003, "New York State proposed and attained commitments from nine "Northeast states to form a cap-and-trade "carbon dioxide emissions program for power generators, called the "Regional Greenhouse Gas Initiative (RGGI). This program launched on January 1, 2009 with the aim to reduce the carbon "budget" of each state's electricity generation sector to 10% below their 2009 allowances by 2018.[133]

Also in 2003, U.S. corporations were able to trade CO2 emission allowances on the "Chicago Climate Exchange under a voluntary scheme. In August 2007, the Exchange announced a mechanism to create "emission offsets for projects within the United States that cleanly destroy "ozone-depleting substances.[134]

Also in 2003, the Environmental Protection Agency (EPA) began to administer the NOx Budget Trading Program (NBP)under the NOx State Implementation Plan (also known as the "NOx SIP Call"). The NOx Budget Trading Program was a market-based cap and trade program created to reduce emissions of nitrogen oxides (NOx) from power plants and other large combustion sources in the eastern United States. NOx is a prime ingredient in the formation of ground-level ozone (smog), a pervasive air pollution problem in many areas of the eastern United States. The NBP was designed to reduce NOx emissions during the warm summer months, referred to as the ozone season, when ground-level ozone concentrations are highest.[135] In March 2008, EPA again strengthened the 8-hour ozone standard to 0.075 parts per million (ppm) from its previous 0.08 ppm.[136]

In 2006, the "California Legislature passed the California Global Warming Solutions Act, "AB-32, which was signed into law by Governor "Arnold Schwarzenegger. Thus far, flexible mechanisms in the form of project based offsets have been suggested for three main project types. The project types include: "manure management, forestry, and destruction of ozone-depleted substances. However, a recent ruling from Judge Ernest H. Goldsmith of San Francisco's Superior Court states that the rules governing California's cap-and-trade system were adopted without a proper analysis of alternative methods to reduce greenhouse gas emissions.[137] The tentative ruling, issued on 24 January 2011, argues that the "California Air Resources Board violated state environmental law by failing to consider such alternatives. If the decision is made final, the state would not be allowed to implement its proposed cap-and-trade system until the California Air Resources Board fully complies with the "California Environmental Quality Act.[138]

In February 2007, five U.S. states and four Canadian provinces joined together to create the "Western Climate Initiative (WCI), a regional greenhouse gas emissions trading system.[139] In July 2010, a meeting took place to further outline the cap-and-trade system.[140] In November 2011, Arizona, Montana, New Mexico, Oregon, Utah and Washington withdrew from the WCI.[141][142]

On 17 November 2008 President-elect "Barack Obama clarified, in a talk recorded for "YouTube, his intentions for the US to enter a cap-and-trade system to limit "global warming.[143]

SO2 emissions from Acid Rain Program sources have fallen from 17.3 million tons in 1980 to about 7.6 million tons in 2008, a decrease in emissions of 56 percent. Ozone season NOx emissions decreased by 43 percent between 2003 and 2008, even while energy demand remained essentially flat during the same period. CAIR will result in $85 billion to $100 billion in health benefits and nearly $2 billion in visibility benefits per year by 2015 and will substantially reduce premature mortality in the eastern United States.["citation needed] A recent EPA analysis shows that implementation of the Acid Rain Program is expected["by whom?] to reduce between 20,000 and 50,000 incidences of premature mortality annually due to reductions of ambient PM2.5 concentrations, and between 430 and 2,000 incidences annually due to reductions of ground-level ozone. NOx reductions due to the NOx Budget Trading Program have led to improvements in ozone and PM2.5, saving an estimated 580 to 1,800 lives in 2008.[144]

The "2010 United States federal budget proposes to support clean energy development with a 10-year investment of US $15 billion per year, generated from the sale of greenhouse gas (GHG) emissions credits. Under the proposed cap-and-trade program, all GHG emissions credits would be auctioned off, generating an estimated $78.7 billion in additional revenue in FY 2012, steadily increasing to $83 billion by FY 2019.[145]

The "American Clean Energy and Security Act (H.R. 2454), a greenhouse gas cap-and-trade bill, was passed on 26 June 2009, in the House of Representatives by a vote of 219-212. The bill originated in the House Energy and Commerce Committee and was introduced by Representatives Henry A. Waxman and Edward J. Markey.[146] The political advocacy organizations "FreedomWorks and "Americans for Prosperity, funded by "brothers David and Charles Koch of "Koch Industries, encouraged the "Tea Party movement to focus on defeating the legislation.[147][148] Although cap and trade also gained a significant foothold in the Senate via the efforts of Republican "Lindsey Graham, Independent and former Democrat "Joe Lieberman, and Democrat "John Kerry,[149] the legislation died in the Senate.[150]

In 2012, under the auction, the reserve price, which is the price per ton of CO2 permit is $10. Some of the emitters obtain allowances for free, which is for the electric utilities, industrial facilities and natural gas distributors, whereas some of the others have to go to the auction.[151]

South Korea[edit]

South Korea's national emissions trading scheme officially launched on 1 January 2015, covering 525 entities from 23 sectors. With a three-year cap of 1.8687 billion tCO2e, it now forms the second largest carbon market in the world following the EU ETS.This amounts to roughly two thirds of the country's emissions. The Korean emissions trading scheme is part of the Republic of Korea's efforts to reduce greenhouse gas emissions by 30% compared to the business-as-usual scenario by 2020.[152]


In November 2011, China approved pilot tests of carbon trading in seven provinces and cities – Beijing, Chongqing, Shanghai, Shenzhen, Tianjin as well as Guangdong Province and Hubei Province, with different prices in each region.[153] The pilot is intended to test the waters and provide valuable lessons for the design of a national system in the near future. Their successes or failures will therefore have far reaching implications for carbon market development in China in terms of trust in a national carbon trading market. Some of the pilot regions can start trading as early as 2013/2014.[154] National trading is expected to start in 2017, latest in 2020. China currently emits about 30% of global emissions, and it became the largest emitter in the world. When the market launched, it will be the largest carbon market in the world.It has made a voluntary pledge under the UNFCCC to lower CO2 per unit of GDP by 40 to 45% in 2020 when comparing to the 2005 levels.[155]


Trading is set to begin in 2014 after a three-year rollout period. It is a mandatory energy efficiency trading scheme covering eight sectors responsible for 54 per cent of India’s industrial energy consumption. India has pledged a 20 to 25 per cent reduction in emissions intensity from 2005 levels by 2020. Under the scheme, annual efficiency targets will be allocated to firms. Tradable energy-saving permits will be issued depending on the amount of energy saved during a target year.[154]

Renewable energy certificates[edit]

Renewable Energy Certificates

"Renewable Energy Certificates (occasionally referred to as or "green tags" [citation required]), are a largely unrelated form of market-based instruments that are used to achieve renewable energy targets, which may be environmentally motivated (like emissions reduction targets), but may also be motivated by other aims, such as energy security or industrial policy.

Carbon market[edit]

Carbon emission trading

Carbon emissions trading is emissions trading specifically for "carbon dioxide (calculated in tonnes of "carbon dioxide equivalent or tCO2e) and currently makes up the bulk of emissions trading. It is one of the ways countries can meet their obligations under the "Kyoto Protocol to reduce carbon emissions and thereby "mitigate global warming.

personal carbon trading and "carbon offset

Market trend[edit]

Trading can be done directly between buyers and sellers, through several organised exchanges or through the many intermediaries active in the carbon market. The price of allowances is determined by supply and demand. As many as 40 million allowances have been traded per day. In 2012, 7.9 billion allowances were traded with a total value of €56 billion.[114] Carbon emissions trading declined in 2013, and is expected to decline in 2014.[156]

According to the "World Bank's Carbon Finance Unit, 374 million metric tonnes of carbon dioxide equivalent (tCO2e) were exchanged through projects in 2005, a 240% increase relative to 2004 (110 mtCO2e)[157] which was itself a 41% increase relative to 2003 (78 mtCO2e).[158]

Global carbon markets have shrunk in value by 60% since 2011, but are expected to rise again in 2014.[159]

In terms of dollars, the World Bank has estimated that the size of the carbon market was 11 billion USD in 2005, 30 billion USD in 2006,[157] and 64 billion in 2007.[160]

The Marrakesh Accords of the Kyoto protocol defined the international trading mechanisms and registries needed to support trading between countries (sources can buy or sell allowances on the open market. Because the total number of allowances is limited by the cap, emission reductions are assured.).[161] Allowance trading now occurs between European countries and Asian countries. However, while the USA as a nation did not ratify the Protocol, many of its states are developing cap-and-trade systems and considering ways to link them together, nationally and internationally, to find the lowest costs and improve liquidity of the market.[162] However, these states also wish to preserve their individual integrity and unique features. For example, in contrast to other Kyoto-compliant systems, some states propose other types of greenhouse gas sources, different measurement methods, setting a maximum on the price of allowances, or restricting access to CDM projects. Creating instruments that are not "fungible (exchangeable) could introduce instability and make pricing difficult. Various proposals for linking these systems across markets are being investigated, and this is being coordinated by the "International Carbon Action Partnership (ICAP).[162][163]

Business reaction[edit]

In 2008, Barclays Capital predicted that the new carbon market would be worth $70 billion worldwide that year.[164] The voluntary offset market, by comparison, is projected to grow to about $4bn by 2010.[165]

23 "multinational corporations came together in the "G8 Climate Change Roundtable, a business group formed at the January 2005 "World Economic Forum. The group included "Ford, "Toyota, "British Airways, "BP and "Unilever. On June 9, 2005 the Group published a statement stating the need to act on climate change and stressing the importance of market-based solutions. It called on governments to establish "clear, transparent, and consistent price signals" through "creation of a long-term policy framework" that would include all major producers of greenhouse gases.[166] By December 2007, this had grown to encompass 150 global businesses.[167]

Business in the UK have come out strongly in support of emissions trading as a key tool to mitigate climate change, supported by NGOs.[168] However, not all businesses favor a trading approach. On December 11, 2008, "Rex Tillerson, the CEO of "Exxonmobil, said a "carbon tax is "a more direct, more transparent and more effective approach" than a cap-and-trade program, which he said, "inevitably introduces unnecessary cost and complexity". He also said that he hoped that the revenues from a carbon tax would be used to lower other taxes so as to be revenue neutral.[169]

The "International Air Transport Association, whose 230 member airlines comprise 93% of all international traffic, position is that trading should be based on "benchmarking", setting emissions levels based on industry averages, rather than ""grandfathering", which would use individual companies’ previous emissions levels to set their future permit allowances. They argue grandfathering "would penalise airlines that took early action to modernise their fleets, while a benchmarking approach, if designed properly, would reward more efficient operations".[170]

Measuring, reporting, verification[edit]

Assuring compliance with an emissions trading scheme requires measuring, reporting and verification (MRV).[171] Measurements are needed at each operator or installation. These measurements are reported to a regulator. For greenhouse gases, all trading countries maintain an inventory of emissions at national and installation level; in addition, trading groups within North America maintain inventories at the state level through "The Climate Registry. For trading between regions, these inventories must be consistent, with equivalent units and measurement techniques.[172]

In some industrial processes, emissions can be physically measured by inserting sensors and flowmeters in chimneys and stacks, but many types of activity rely on theoretical calculations instead of measurement. Depending on local legislation, measurements may require additional checks and verification by government or third party "auditors, prior or post submission to the local regulator.


In contrast to an ordinary market, in a pollution market the amount purchased is not necessarily the amount 'consumed' (= the amount of pollution emitted). A firm might buy a small amount of allowances but emit a much larger amount of pollution. This creates a troublesome "moral hazard problem.

This problem may be solved by a centralized regulator. The regulator should perform Measuring, Reporting and Verification (MRV) of the actual pollution levels, and "enforce the allowances.[173] Without effective MRV (Measuring, Enforcement methods include "fines and "sanctions for polluters that have exceeded their allowances. Concerns include the cost of MRV and enforcement, and the risk that facilities may lie about actual emissions. The net effect of a corrupt reporting system or poorly managed or financed regulator may be a discount on emission costs, and a hidden increase in actual emissions.

According to Nordhaus, strict enforcement of the Kyoto Protocol is likely to be observed in those countries and industries covered by the EU ETS.[174] Ellerman and Buchner commented on the European Commission's (EC's) role in enforcing scarcity of permits within the EU ETS.[175] This was done by the EC's reviewing the total number of permits that member states proposed that their industries be allocated. Based on institutional and enforcement considerations, Kruger et al. suggested that emissions trading within developing countries might not be a realistic goal in the near-term.[176] Burniaux et al. argued that due to the difficulty in enforcing international rules against sovereign states, development of the carbon market would require negotiation and consensus-building.[177]

An alternative to centralized regulation is distributed regulation, in which the firms themselves are induced to inspect the other firms and report their misbehavior. It is possible to implement such systems in "subgame perfect equilibrium. Moore and Repullo[178] present an implementation with unbounded fines; Kahana and Mealem and Nitzan[179] present an implementation with bounded fines. Their work extends the work of Duggan and Roberts[180] by adding a second component which takes care of the moral hazard.


Chicago Climate Justice activists protesting cap and trade legislation in front of "Chicago Climate Exchange building in Chicago Loop

Emissions trading has been criticised for a variety of reasons.

For example, in the popular science magazine "New Scientist, Lohmann (2006) argued that trading pollution allowances should be avoided as a climate stabilization policy for several reasons. First, climate change requires more radical changes than previous pollution trading schemes such as the US SO2 market. It requires reorganizing society and technology to "leave most remaining fossil fuels safely underground". Carbon trading schemes have tended to reward the heaviest polluters with 'windfall profits' when they are granted enough carbon credits to match historic production. Expensive long-term structural changes will not be made if there are cheaper sources of carbon credits which are often available from less developed countries, where they may be generated by local polluters at the expense of local communities.[181]

Research by Preston Teeter and Jorgen Sandberg has shown that the flexibility, and thus complexity, inherent in cap and trade schemes has resulted in a great deal of policy uncertainty surrounding these schemes. Such uncertainty has beset such schemes in Australia, Canada, China, the EU, India, Japan, New Zealand, and the US. As a result of this uncertainty, organizations have little incentive to innovate and comply, resulting in an ongoing battle of stakeholder contestation for the past two decades.[2]

Lohmann (2006b) supported conventional regulation, green taxes, and energy policies that are "justice-based" and "community-driven."[182] According to Carbon Trade Watch (2009), carbon trading has had a "disastrous track record." The effectiveness of the EU ETS was criticized, and it was argued that the CDM had routinely favoured "environmentally ineffective and socially unjust projects."[183]

"Annie Leonard's 2009 documentary The Story of Cap and Trade criticized carbon emissions trading for the free permits to major polluters giving them unjust advantages, cheating in connection with "carbon offsets, and as a distraction from the search for other solutions.[184]


Forest campaigner Jutta Kill (2006) of European environmental group "FERN argued that offsets for emission reductions were not substitute for actual cuts in emissions. Kill stated that "[carbon] in trees is temporary: Trees can easily release carbon into the atmosphere through fire, disease, climatic changes, natural decay and timber harvesting."[185]

Permit supply level[edit]

Regulatory agencies run the risk of issuing too many emission credits, which can result in a very low price on emission permits.[115] This reduces the incentive that permit-liable firms have to cut back their emissions. On the other hand, issuing too few permits can result in an excessively high permit price.[186] This an argument for a hybrid instrument having a price-floor, i.e., a minimum permit price, and a price-ceiling, i.e., a limit on the permit price. However, a price-ceiling (safety value) removes the certainty of a particular quantity limit of emissions.[187]

Permit allocation versus auctioning[edit]

If polluters receive emission permits for free ("grandfathering"), this may be a reason for them not to cut their emissions because if they do they will receive fewer permits in the future.[188]

This "perverse incentive can be alleviated if permits are auctioned, i.e., sold to polluters, rather than giving them the permits for free.[186] Auctioning is a method for distributing emission allowances in a cap-and-trade system whereby allowances are sold to the highest bidder. Revenues from auctioning go to the government and can be used for development of sustainable technology[189] or to cut "distortionary taxes, thus improving the efficiency of the overall cap policy.[190]

On the other hand, allocating permits can be used as a measure to protect domestic firms who are internationally exposed to competition.[186] This happens when domestic firms compete against other firms that are not subject to the same regulation. This argument in favor of allocation of permits has been used in the EU ETS, where industries that have been judged to be internationally exposed, e.g., cement and steel production, have been given permits for free).[191]

This method of distribution may be combined with other forms of allowance distribution.[4]

Distributional effects[edit]

The US "Congressional Budget Office (CBO, 2009) examined the potential effects of the "American Clean Energy and Security Act on US households.[192] This act relies heavily on the free allocation of permits. The Bill was found to protect low-income consumers, but it was recommended that the Bill be made more efficient by reducing welfare provisions for corporations, and more resources be made available for consumer relief.


Distinct cap-and-trade systems can be linked together through the mutual or unilateral recognition of emissions allowances for compliance. Linking systems creates a larger carbon market, which can reduce overall compliance costs, increase market liquidity and generate a more stable carbon market.[193][194] Linking systems can also be politically symbolic as it shows willingness to undertake a common effort to reduce GHG emissions.[195] Some scholars have argued that linking may provide a starting point for developing a new, bottom-up international climate policy architecture, whereby multiple unique systems successively link their various systems.[196][197] In 2014, the U.S. state of California and the Canadian province of Québec successfully linked their systems. In 2015, the provinces of Ontario and Manitoba agreed to join the linked system between Quebec and California.[198]

The "International Carbon Action Partnership brings together regional, national and sub-national governments and public authorities from around the world to discuss important issues in the design of emissions trading schemes (ETS) and the way forward to a global carbon market. 30 national and subnational jurisdictions have joined ICAP as members since its establishment in 2007.[199]

See also[edit]


  1. ^ a b Stavins, Robert N. (November 2001). "Experience with Market-Based Environmental Policy Instruments" (PDF). Discussion Paper 01-58. Washington, D.C.: Resources for the Future. Retrieved 2010-05-20. Market-based instruments are regulations that encourage behavior through market signals rather than through explicit directives regarding pollution control levels or methods 
  2. ^ a b c Teeter, Preston; Sandberg, Jorgen (2016). "Constraining or Enabling Green Capability Development? How Policy Uncertainty Affects Organizational Responses to Flexible Environmental Regulations". British Journal of Management. "doi:10.1111/1467-8551.12188. 
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  4. ^ a b c d e "Cap and Trade: Key Terms Glossary" (PDF). Climate Change 101. Center for Climate and Energy Solutions. January 2011. Retrieved 27 October 2014. 
  5. ^ "Allowance Trading". U.S Environment Protection Agency. Retrieved Oct 21, 2014. 
  6. ^ Judson Jaffe; Matthew Ranson; Robert N. Stavins (2009). "Linking Tradable Permit Systems: A Key Element of Emerging International Climate Policy Architecture" (PDF). Ecology Law Quarterly. 36 (789). Retrieved 2010-08-25. 
  7. ^ Tietenberg Tom (2003). "The Tradable-Permits Approach to Protecting the Commons: Lessons for Climate Change". Oxford Review of Economic Policy. 19 (3): 400–419. "doi:10.1093/oxrep/19.3.400. Retrieved 2010-08-25. 
  8. ^ Stavins, Robert N. (November 2001). "Experience with Market-Based Environmental Policy Instruments" (PDF). Discussion Paper 01-58. Washington, D.C.: Resources for the Future. Retrieved 2010-08-25. 
  9. ^ a b "Emissions trading schemes around the world", Parliament of Australia, 2013.
  10. ^ a b c d Montgomery, W.D (December 1972). "Markets in Licenses and Efficient Pollution Control Programs". Journal of Economic Theory. 5: 395–418. "doi:10.1016/0022-0531(72)90049-X. 
  11. ^ "Cap and Trade: Acid Rain Program Results" (PDF). Environmental Protection Agency. Archived from the original (PDF) on 24 September 2015. 
  12. ^ EU Emissions Trading System (EU ETS) Archived December 14, 2009, at the "Wayback Machine.. UK Department of Energy and Climate Change. Retrieved 2009-01-19.
  13. ^ "USEPA's Clean Air Markets web site". US EPA. Retrieved 2009-11-03. 
  14. ^ a b Cap and Trade 101, "Center for American Progress, January 16, 2008.
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Further reading[edit]

External links[edit]

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