This paper will examine the policy issues and problems associated with implementing an international regime to trade permits for carbon dioxide emissions, with the goal of a cost-effective worldwide reduction of atmospheric carbon dioxide levels in order to alleviate or postpone global warming.
The enhanced greenhouse effect, which causes global warming, requires an international treaty to address the international nature of the problem. Unilateral action, or action by a group of countries, would be insufficient to solve the problem; the United States, as the world superpower and the world's primary greenhouse gas producer, is in a unique position to lead the negotiations towards a treaty, but must gain widespread participation in order to succeed. The developed countries, the former Soviet bloc, the debtor nations, and the less developed countries, all bring conflicting demands to the negotiations. Despite the uncertainty of the extent and effects of global warming, and despite the conflicting demands, a compromise treaty must be implemented to avoid a potentially catastrophic climate change.
A Climate Change Treaty was signed at the UNCED conference in Rio in June 1992. That treaty provides a framework within which future treaties (called "protocols") can be written to commit signatories to emissions reductions. The "framework / protocol" approach was used successfully to negotiate CFC emissions reductions -- the Montreal Protocol is a treaty within the framework treaty of the Vienna Convention. This paper addresses the issues involved with a "greenhouse protocol," a treaty which would commit to actual emissions reductions, as the next step to follow the Rio Climate Change Treaty.
A primary need for a workable treaty is that it be affordable to the participants, or at least, that it be achieved at a minimum cost. A primary goal of a successful treaty is that it reduce greenhouse gas emissions sufficiently to allow ecological and social adaptation to the inevitable atmospheric temperature increase. The traditional "command and control" approach could achieve the goal of reducing emissions, but such an approach would certainly not be cost-effective and would likely be prohibitively expensive. The more innovative "carbon tax" approach could fill the need for cost-effectiveness, but does not directly control emissions and hence could fail in its goal of reducing emissions. A carbon tax also implies setting up an agency to collect the tax, redistribute it, and enforce it; because of the enormous sums of money involved, such an agency is, at best, politically unpalatable. An "emissions trading" approach, which establishes a market for carbon emission reductions, could fulfill the goal of reducing emissions as well as the need for minimizing cost.
The primary experience with markets for emission reductions has been in the United States, via the Environmental Protection Agency's emissions trading program for alleviating air pollution. The EPA program has been in effect since the Clean Air Act was implemented in the early 1970s. The "offset policy" allows new emissions sources only if the best technology were applied to the source, and if the additional emissions were offset by reducing excess emissions at other sources. The "bubble policy" allows transfer of emission credits between existing sources, as long as the total emissions do not increase. The "banking policy" allows sources which are below their allocated limit to retain credits for future use. The concept underlying the program is that control decisions are made by those who are best prepared to choose optimal solutions, and hence the overall cost of emissions reduction is minimized because the marginal costs of each source are equalized, since any source with a higher reduction cost will buy permits from a source with lower costs. Congressional legislation has recently been proposed to extend the trading policy to greenhouse gas emissions within the US.
This paper examines how an international greenhouse gas emissions trading program could be implemented, by drawing on the experience of the US programs. Greenhouse gases are "uniformly mixed accumulative pollutants," in the EPA parlance, and as such are amenable to emissions control (quantitative) rather than ambient control (qualitative). The international supervising agency, or its domestic representatives, must monitor quantity of emissions from each source; the purpose of the agency is only to monitor emissions and to use that information to allocate credits. Market forces will create the incentive for each source to determine its least-cost strategy, and in the longer term, will encourage technological advancements with worldwide benefits. The initial allocation scheme for distributing permits is a point of conflicting interest. It will figure prominently in any treaty negotiations: the developed countries have an interest in basing allocations on currently existing emissions, since they are the large emitters now; less developed countries have an interest in a per-capita allocation basis, since they are below the world average of per capita emissions. This paper suggests a compromise of a sliding scale, beginning with country allocations based on emissions in an historical base year, and progressing over 10 years to an allocation based on adult population in the same historical base year. The compromise plan includes: technology transfer and capital transfer from the developed countries to the less developed countries; debt forgiveness to foster efficient development; and accounting for tropical forest preservation, a "carbon sink," as a capital asset and source of emission reduction credits. Special emphasis is given to the United States' implementation plan, since the US is the world's largest source of carbon emissions. The US can reduce its emissions by 25% within a "no regrets" policy, that has a net cost savings due to increased efficiency.
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