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The Debate over Greenhouse Gas Cap-and-Trade

Introduction

International talks are intensifying over what policy should follow the Kyoto Protocol, a treaty set to expire in 2012 that established binding reductions of greenhouse gas emissions for thirty-six countries. The Obama administration, in a split with the previous U.S. administration, favors binding emissions cuts and U.S. lawmakers are stepping up debate on legislation that would establish emissions targets for U.S. industries. A central feature of Kyoto and any new global policy is expected to be a greenhouse gas cap-and-trade program. Problems with some current trading markets offer lessons for crafting new cap-and-trade policies.

Defining Cap and Trade Programs

The Kyoto Protocol established a market-based mechanism to allow developed countries with binding emissions targets to reduce greenhouse gases such as carbon dioxide, methane, carbon tetrafluoride, trifluoromethane, and nitrous oxide. Under the cap-and-trade system, industries would be allocated allowances limiting them to a certain amount of greenhouse gas emissions each year. Most trading schemes use one ton carbon-dioxide units for sale, or convert non-CO2 gases into CO2-equivalent units for the purposes of trading. Industries are also allowed to purchase credits that offset their carbon output above those caps. The goal of the cap is to prevent increases in net emissions. Some facilities may find it more economical to reduce their emissions and then sell their surplus emission allowances as credits, while others may find it cheaper to buy credits to offset their emissions rather than make direct reductions. Greenhouse gas emission credits can be purchased or sold from either a carbon market or a project certified by the United Nations.

Cap-and-trade systems have been utilized in the past to successfully reduce other types of emissions. The cap-and-trade system instituted under the 1990 Clean Air Act amendments in the United States...

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