October 22, 1997


The principle of emissions trading is to use the efficiency of the market place to achieve environmental objectives at the lowest possible cost. Under an international emissions trading regime, a country (or firm) would be able to meet its emissions reduction target by reducing pollution itself, purchasing reductions from another country (or firm) that was able to achieve excess gains, or some combination of both.

Given an effective international regime, emissions trading provides a powerful incentive for nations to reduce below the amount required and then sell excess reductions to others who in turn avoid more costly actions. The U.S. has proposed that emissions trading be permitted among all countries that agree to a binding emissions target.

How it would work

Consider a simplified example for how international emissions trading might work. Country A and Country B must reduce emissions by 100 tons each. It might cost each country $1,000 to reduce 100 tons individually for a total cost of $2,000. However, if Country A could reduce its emissions by 200 tons for a total cost of $1,500 and sell half of these reductions to Country B, the overall target would be achieved for $500 less, a savings of 25 percent.

U.S. experience

Emissions trading is being used successfully at the domestic level to reduce sulfur dioxide emissions (which cause acid rain) under the Clean Air Act. Achieving targeted reductions was originally estimated to cost $5 billion annually if traditional controls had been required and $4 billion with emissions trading. A GAO estimate after the initial stage of emissions trading now puts the cost at $2 billion per year, or 60 percent below the original estimate with pollution reductions significantly ahead of schedule. Emissions trading has also been successful in cutting the costs of phasing out leaded gasoline and in curbing the production of chlorofluorocarbons which deplete the ozone layer.

Cost savings

According to the 1997 Economic Report of the President, international emissions trading for carbon dioxide could lower the cost of reductions by 50 percent below the minimum achievable using purely domestic programs.

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