Establishing global greenhouse trading system

Trading in entitlements to greenhouse gas emissions

Context

Since the use of markets can dramatically lower the cost of controlling greenhouse gas emissions, it seems clearly in the self-interest of the major emitters to act as pioneers. The participation of some developing countries will also be important, both for the credibility of the scheme as well as to test appropriate mechanisms for the transfer of funds and technical assistance.

Implementation

Starting in early 1995, the UNCTAD secretariat launched a series of activities geared toward the establishment of a voluntary, non-binding pilot scheme for international trades in carbon dioxide (CO2) emission entitlements. The purpose of the pilot scheme was to collect information, carry out research and gain experience in this area, including the testing of certain mechanisms essential to the long-term viability of a global system of tradable permits such as certification, monitoring, trading, clearing, accounting and dispute resolution.

The EU is scheduled to start trading greenhouse gas (GHG) emission credits from 2005, under its emission trading Directive. Under the adopted Directive, member states will be able to exempt specific companies from participating in the mandatory scheme, however this process will not be easy. The draft Directive has also been expanded to include additional industrial sectors and all of the GHG's identified under the Kyoto Protocol.

Claim

How can the trading systems be sufficiently well monitored to avoid abuse of any kind? For example, who will verify that the reductions which are paid for under any one of these systems are indeed being carried out the seller or grant recipient, and how will the monitoring be carried out? Without a good system, the global environment could be the loser in a game that would have us buying and selling credits without actually making any real reductions in greenhouse gas emissions.

Both atmospheric stabilization of greenhouse gases and the entry of developing countries into the climate regime are likely to require a move to per capita emission targets. Advocates of contraction and convergence point to its inherent equity and its ability to bring together developed and developing countries in a single framework. However, contraction and convergence recognizes that emissions from developing countries will grow and does not hold back their development in order to rectify damage caused by developed countries.

Contraction and convergence is based on per capita emissions and offers an opportunity to address issues of equity. With emissions shared on a per capita basis, developed and developing countries could trade surplus emissions rights.

According to this strategy, all countries will be allotted entitlements to pollute on the basis of a single per capita allowance. While the rich countries will have to contract their emission levels to reach this target, the poor countries will be allowed to develop their economies by increasing their emission to that level. This convergence target will have to be reached in a given time-period and, thereafter, will decline uniformly for all countries.

The per capita emission and the time for convergence will have to be negotiated internationally, taking into account the safe levels of CO2 concentration that can be allowed in the atmosphere. If these entitlements are permitted to be traded, developing countries can get substantial resources as a matter of right and not as handouts. These resources would help them leapfrog into clean technologies for power and transport and for overall development as well, without having to worry about losing their bargaining positions.