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An Environmental Perspective on International Greenhouse Gas Emission Trading

Greenhouse Gas

In the past, I have expressed less concern with international emissions trading than the clean development mechanism or joint implementation with developing countries. A number of reasons underlie my and other's distinction between trading and joint implementation:

  • There has been a tendency to see international emissions trading as good for countries like Canada. There are estimates that Canada could reduce emissions far beyond the Kyoto requirements simply by pursuing emission reductions which are, from a societal perspective, worth doing for reasons unrelated to climate change, but there are limits to these estimates and the supply of no-regrets measures might become limited. Emissions trading could potentially reduce implementation costs.
  • International emissions trading has generally been see as good for the environment. By reducing the cost of greenhouse gas emission reductions there would be greater political appetite for significant emission reductions in the future. Moreover, if emission reductions occurred mainly in countries like Russia where the cheap emission reductions exist that was good too. While Canada might not get the benefit of reduced local pollution (estimated as worth about $3 to $7 USD per ton of carbon reduced), air pollution problems are far greater in Russia and so too the potential environmental spin-offs..
  • Emissions trading was good for countries like Russia that need assistance to rebuild. It was a mechanism by which a company like West Coast Energy or TransAlta would be encouraged to invest in Eastern Europe, fixing up leaky natural gas pipelines or retrofitting dirty inefficient power plants. Analyses show that the Annex 1 countries with the greatest economic benefits from greenhouse gas emissions reductions are those of the former Soviet bloc.

On the other hand, there have been far greater concerns regarding joint implementation. There are clear advantages in reducing costs and demonstrating the desirability of emission reductions to the developing world, but; most environmentalists have felt that these are overwhelmed by the potential for nations to generate credits from projects in the developing world that would have occurred anyway. If credit is given in such cases it reduces the environmental effectiveness of any developed world commitments.

The distinction between joint implementation (now the clean development mechanism) and trading has been based on a few assumptions. It is based on the assumption that any emissions trading system would be accompanied by enforcement mechanisms and responsibilities that would create incentives to comply. It is based on the assumption that no nation would agree to emission allocations that exceeded another nations' probable emission levels.

Unfortunately these assumptions are wrong. While international trading has potential, most of the proposals being discussed create a system which, if it is accepted by the international community, would allows us to maintain technical compliance with the Kyoto Protocol while allowing far higher emissions. Moreover, some of the international trading rules being discussed may reduce the eventual likelihood of getting developing countries to sign onto emission caps.

The basic problems are as follows:

  • There is a likelihood of countries meeting international commitments through clean development mechanism projects that would have occurred in any event. This is the problem of credit for non-additional projects;
  • Proposed trading systems would allow Russia, the Ukraine and other states to sell portions of their allowed emissions that exceed their likely emission levels under "business as usual". This is the problem of hot air.
  • The JUSCANZ group (essentially the non-EU members of the OECD) has supported weak enforcement provisions and a trading system in which nations could buy emission rights that are not surplus to the needs of the nation selling them. This is the problem of "weak enforcement and seller beware" trading system.
  • The JUSCANZ group has resisted any restrictions on the extent to which trading and the clean development mechanism can be used to achieve emission reduction targets. This in the unlimited buyout problem.
Publication Date: 
April 1, 1998
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