Mitigating Climate Change Through Trade Schemes

Subject: Environment
Pages: 30
Words: 8113
Reading time:
31 min
Study level: College


The literature review of this paper is regarding avoiding the climate change process with the help of trading schemes. These trading schemes are unlike the past methods that worked on command and control policy. Instead of that, the present schemes propose trading activities even in control of emissions by offering allowances regarding emissions. However, the total amount of emissions is fixed at the national or international level depending on the schemes at both levels. They can be termed emission trading schemes, and if they are at the national level, a fixed amount of emissions for every year will be fixed and is parted into allowances. These allowances will be granted to the companies that achieved emission reduction targets or the industries which buy them for a particular cost so that money can be used for environmental protection processes.

The important agreement that acted as a basis and catalyst for the emission trading schemes is the Kyoto Protocol. The protocol has set up targets to reduce the emissions in industrial nations by 5.2 percent of 1990 levels. However, as countries like the USA did not accept the Kyoto Protocol and framed their laws to reduce emissions, the UK and other European countries also made their schemes. The USA made the clean air act as well as emission schemes to reduce sulfur dioxide and the UK made its emission trading scheme. European Union also made the EU ETS reduce emissions. The paper discusses all these aspects alongside the policies followed by developed as well as developing countries. The differences between developed and developing countries regarding emission reductions and the aspect of per capita emissions also finds a place in the review. The policies and schemes of Asia Pacific countries, mainly China, India, and South Korea had been discussed. In the context of India, the energy efficiency schemes have been reviewed as it was found that the steel industries and electric power generating units in that country are using old technologies and low-quality coal that emit more GHG.

Literature Review

The present environmental policy observed worldwide is in contrast with the ‘command and control’ policy of the past. The present policy is marketing oriented and enables governments to accomplish regulatory goals. The previous policy used to be costly as well as cumbersome as there is no participation from the individual players who were responsible for pollution. The market approach for the environmental policy like EU ETS resulted in governments using market instruments to administer the prescriptive regulation. It also reduced implementation costs as the individual players are charged for an increase of emissions or noncompliance with the regulations. In this regard, Jody Freeman & Charles D. Kolstad (2007, 3) mentions that the U.S environmental protection agency (EPA) has adopted by rule an emissions trading program. This seeks to reduce emissions. EU also signed the Kyoto Protocol and introduced a significant carbon market to implement it.

During the Bush regime, the clear skies initiative has been introduced, which made the possible market trading scheme for a variety of air pollutants. Jody Freeman & Charles D. Kolstad (2007, 5) explains that the theory behind emission trading is to ‘allow firms to buy and sell pollution rights’(Jody Freeman & Charles D. Kolstad: 2007, 5). This buying and selling of pollution rights are capable of achieving the reduction of pollution to the desired level than the prescriptive standards framed by governments for individual firms to follow. In the market-based approach, the firms which can reduce emissions for less cost can buy credits and sell them for the companies which find it difficult to reduce emissions and the prices of the credits should be in a range that enables the governments to reduce the ultimate regulatory target. If the firms reduce the emissions, they get credits to sell. However, if they are unable to reduce emissions, they have to buy credits and the amount accrued for the government in this process can be used for the programs that reduce environmental pollution. The emissions trading schemes also contain the abatement of gases for firms within a particular industry (Jody Freeman & Charles D. Kolstad: 2007, 3-5).1

The European Union Emissions trading system, Which is otherwise also known as EU-ETS can be termed as a landmark in environmental policy. ETS is the world’s large scale greenhouse gas trading program. It has approximately 12,000 installations in 25 countries. According to Global Climate Change (n.d.), the ETS offers a chance a deep insight into the market-based environmental program. Until now, climate change schemes were not trading related and are not commercially viable. ETS has been preceded by United Nations Framework Convention on Climate Change (UNFCCC) in 1982 and Kyoto Protocol in 1997, which committed industrialized nations to reduce the level of emissions by 5.2 percent when compared to 1990 levels by 2012. However, as EU nations agreed to reduce their emissions by eight percent, they found it difficult to do it according to their domestic policy. Hence, many European countries, including the UK, Germany enacted EU-ETS to meet the targets of the Kyoto protocol in 2004 it extended to 25 countries.

The important regulation in EU-ETS is to enable the implementation of the Kyoto treaty. As per the norms of the ETS, the control of sulfur dioxide (SO2) belittles all the existing GHG trading systems including the US programs. The US has designed clean air act amendments and nitrogen oxides. However, the grandness of ETS lies in its institutional complexity for market-based climate mitigation programs. As per the regulation in EU-ETS six key industrial sectors are covered. They are electricity and heat production plants. These plants come under EU-ETS if their capacity is greater than 20 MW. The oil refineries, coke ovens, metal ore, and steel installations as well as cement kilns, glass manufacturing, ceramics, paper, and pulp and board mills also come under ETS depending on their capacity and manufacturing capability. As per the specifications, ETS identified 12000 installations in 25 European Union countries. The implementation of the regulations in ETS will be done according to allowances. The countries can identify locations in which they want to reduce GHG, and they have to surrender allowances according to the amount of CO2 emitted. Hence, more allowances for the countries, which reduce the emissions can be termed as the essence of the regulation mentioned in ETS (Global Climate Change: n.d).2


A wide range of national policies as well as instruments is with the governments to offer incentives to the firms to reduce emissions. Terry Barker et al (2007, 19) states that the applicability of these policies depends on the national circumstances as well as the understanding of interactions. To maximize the advantages and minimize the disadvantages, Terry Barker et al., (2007) lay down four main criteria to evaluate policies and instruments. The evaluation should consider ‘effectiveness, cost-effectiveness, distributional effects, including equity and institutional feasibility’ (Terry Barker et al: 2007, 19). Whatever may be the outcome of the evaluation of climate policies of different governments, the integration of them is important to provide some certainty about emission levels. The regulations as well as standards have provided some certainty about emission levels. However, the economic instruments like charges and taxes had set a carbon price and decided tradable permits for emissions. The environmental effectiveness of the tradable permits depends on the way they were allotted. The fluctuations in carbon price have been minimized to determine the emissions and their reductions accurately. The ETS provides an opportunity for governments to provide subsidies and tax incentives for firms, which achieved targets regarding the reduction of emissions (Terry Barker et a: 2007, 15-20).

According to the department of trade and industry of the UK’s website, the country agreed to reduce emissions of greenhouse gases by 12.5 percent below 1990 levels. The target should be reached by 2012 and in addition to that, the country agreed to make a 60 percent reduction by 2050. To reach those targets, the UK government in 2006 launched a set of policy measures to its climate change program that decides the course of regulation. This policy includes the UK emissions trading scheme, which is also known as UK ETS. It has set the GHG reductions of the UK on track to meet the ambitious goals mentioned above. The program has been run by the department for environment, food, and rural affairs (Defra). The focus of this program is to reduce CO2 emissions and little specifications in the policy regarding greenhouse gases like methane, nitrous oxide, hydrofluorocarbons, PFC, and SF6. However, these gases are included in the landfill directive of EU wide legislation. The renewables obligation has prompted the UK to reduce emissions of methane from landfills. To achieve the above targets, renewable energy generation in the UK has two policies to follow.

They are ‘The renewable Obligation and Exemptions from the UK Tax on business energy use, the Climate Change Levey” ( Department of Trade and Industry, 2006). The regulation of ETS is based on the trading of emissions and allowances. The emissions will be allowed after each organization’s agreed reduction, and allowances will be given equally to target emissions. However, the participants and organizations have to surrender allowances to cover their emissions of GHG every year. For example, if any participant of ETS chose to reduce actual emissions below the target, it can sell the allowances to other companies and have to buy allowances if they chose emissions that are excess of target. As a whole, it will be clear that the participant who reduced the emissions above the target will get allowances regarding target emissions for the next year, and the one who did not meet the target has to buy the allowances. This means the ETS regulation makes the emissions of GHG above the prescribed limit costlier (Department of Trade and Industry: 2006, 2-4).3

The significant aspect of the regulation of ETS is setting the cap on emissions. This can be done by deciding the number of emission allowances given to a participant based on the emission reduction performance. The more the emission reductions, the greater the emissions allowances in the next year thus encouraging the reduction process in the present year. However, Michael Grubb (2009: 8) states that the EU experience regarding ETS has resulted in frequently overstated caps, and at times it was easier to achieve more than anticipated and also reduced the expected benefit from the reductions. Hence, the Waxman-Markey bill in contrast to the regulation before 2005 aimed to regulate fossil fuels used in transportation; both commercial and residential sectors. Michael Grubb (2009: 9) indicates that while EU ETS set caps to 2020 and a review in 2025, the Waxman Markey bill has the year 2050 as the target while setting the emission caps. The differences in design can give the variations in regulation between EU ETS and Wasman Markey Bill. Before 2005, the EU ETS system spanning the 27 member states ended up with a patchwork of designs not compatible for a group of countries in the absence of the centralized system as each industry or sector has its national allocation plans.

Thus the EU recognized and set up a phase I that starts in 2005 and ends in 2007, which was insulated from subsequent phases. Phase II ends in 2012. The targets coincide with the obligations under the Kyoto Protocol. The EU member states decided phase III as from 2013-2020 and abandoned national allocation plans in favor of centralized allocation as per the EU directive accepted by member states in December 2008. Michael Grubb (2009:10) mentions carbon price as the value that estimates the level of difficulty to achieve the emission caps. Grubb explains that in phase from 2005 to 2007 the carbon price rose due to the increase of natural gas prices and then declined due to a substantial surplus of emission allowances resulting in the price declining to zero. As carbon price is a cost of GHG emissions, and it’s zero values made it easier to achieve caps on emissions. However, phase II from 2008-2012 has a substantial carbon price in 2008 but fell during the first two months of 2009 thus indicating that the differences in emissions in the initial and later stages of each phase (Michael Grubb: 2009, 8-10). 4 The above details emphasize the need to explain the way the emissions cap works. The report released by the Environment protection agency of the United States of America in 2002 explains how the ‘cap’ works as a ceiling on emissions. It indicates that an efficient unit reduces emissions and takes allowances and a unit that is not in that situation buys allowances from the former and reduces as much it is possible and to release the remaining emissions, it uses the allowances bought. Thus, the total emissions’ target can be reached with the former unit reducing more than the target and the second one buying allowances from the first one emits more than the target, but on average will meet the target of reduction of emissions on an overall scale that will be considered on a particular landscape or within a group of countries or in a country.

After that, the EPA report (2002, 4) states that the Acid Rain program reduced the emissions by more than 6.5 million tons from 1980 levels and approximately 10.6 million tons when compared to the levels of 2001. It forecasts that by 2010, the program is capable of lowering the cap to 8.95 million tons that is equal to a 50 percent reduction of the SO2 emitted in 1980. The report indicates that emission allowances reinforce the cap. The indication is about limiting the number of allowances, which ensures the integrity of the cap. Each allowance authorizes one ton of SO2 emissions and at the end of each year, the allowances of each firm can be banked. However, there will be a limit on the number of allowances issued so that the system of allowances shall not let loose the emissions in the following year. The allowance system along with the possible alternatives will provide options for reducing emissions. The monitoring and penalties ensure compliance will add to the system of options for reducing emissions to meet the emission reduction targets. For example, the monitoring system is EPA certified in the United States, so that it can monitor each source continuously and can record emissions of SO2. The system accounts for every ton of emissions of SO2. The same type of monitoring will be there in EU ETS also for all the GHG gases emitting in EU member countries (EPA: 2002, 2-4).5

Economic instruments

The economic instruments in the Climate change programs of the UK were based on the Kyoto Protocol. Using economic instruments for implementation of climate change programs has come forward in 1998 in a study of government. As the study involved the industrial as well as commercial sectors, it recommended the mixed approach that contains regulations combined with regulation. Stephen Smith., Joseph Swierzbinski (2007, 133) mentions the UK’s Climate Change Programme (DETR 2000) that implements the measures that are framed to achieve the commitments of the UK in the Kyoto Protocol. The interlocking functions on the name of ‘The Climate change Levy (CCL, an environmental tax, Negotiated Sectoral Climate Change Agreements, The UK Emissions Trading Scheme’(Stephen Smith et al: 2007, 133). The first one Climate change levy has been announced in 1999 and works in the form of single-stage excise. It will be levied at the time of supply to energy users in different industries, and the levy will be framed according to their recorded emissions. The levy will be different for various gases. It is 0.15p/kWh for the usage of gas and coal and 0.07p/kWh for LPG and 0.43p/kWh for electricity.

The system has exempted the fuels used for transportation as well as for domestic purposes. However, these rates have been negotiated by companies in the energy-intensive sectors. These negotiations resulted in ‘Climate Change Agreements ‘(Stephen Smith., Joseph Swierzbinski, 2007). These are the agreements between industries and the government. These agreements have proposed collective quantitative targets to achieve the required ‘energy efficiency or carbon emissions’ (Stephen Smith., Joseph Swierzbinski: 2007). The aspects in these agreements have made possible the emissions’ trading for GHG. This has been launched in April 2002. The initial life span of this trading is five years starting from 2002 and ending in 2006. As emissions trading is a first-time initiative, the individual firms have been offered flexibility to be compliant with the cost of abatement of GHG. The important aspect of this trading initiative is to ‘establish the London financial markets as the global location for environmental permit trading’(Stephen Smith., Joseph Swierzbinski: 2007, 135). 6 Whatever may be the phase, the sector coverage is important to know the details of reductions of emissions.

Sector Coverage

ETS considers sector coverage also as some of the emissions result in calamities like Acid rain. The emissions of gases like SO2 and oxides of nitrogen form sulphuric and nitric acids in the atmosphere. Hence Richard Schmalensee., Paul L. Josklow., A. Denny Ellerman., Juan Pablo Montero & Elizabeth M. Bailey (2000, 54) mentions title IV of the Clean air act amendments of 1990. This title has put a cap on the utility of SO2 to reduce its emissions. The cap was on electric generating units as sulfur dioxide will be emitted out of burning coal. During the phase, I, which comprises the period from 1995 to 1999, aggregate annual emissions from the 263 large emitting units have been accounted for 22 percent of heat input at US fossil-fueled generating units. The phase has been started in 2000, and the regulation ensued tighter cap by bringing all the existing and new fossil fueled electric generating units in the US. The same has been observed in Europe by EU ETS and to implement this, the combustion device; a boiler in electric units has been taken as a generating unit in each location. The emissions could be calculated by the number of generating units present.

‘Allowances can be bought or sold without restriction to cover emissions anywhere in the continental United States. The free trade of allowances resulted in a decrease of emissions in the majority of cases and if not they have resulted in accumulation of the fund to mitigate the climate change’ (Richard Schmalensee et a: 2000, 55-56). Richard Schmalensee et al (2000, 57)’s explanation depends on the fact that the allowances to be more expensive in phase II when compared to the cost of them in Phase I. The reason is that the constraint on emissions in phase I is not binding and hence an encouragement is necessary to be committed to reducing the emissions. Thus the companies can save allowances in phase I and can use them in phase II when they turn expensive. Richard Schmalensee et al., (2000, 58) further explains that the price of allowances should be equal to or less than the marginal abatement costs so that the industries are encouraged to reduce the emissions instead of stopping the production. To do so, the regulation should be in such a way that if the costs of abatement were not to decrease, the emissions from the units considered in regulation should fall so that after the exhaustion of the allowance bank in Phase II, the price of allowance may be equal to abatement cost (Richard Schmalensee et a: 2000, 56-58). 7

Gas Coverage

Considering abatement costs and allowances, the gas coverage is important as it depends on regulations and schemes adopted by the governments or groups of countries. Sorrell, S (2010) mentions an upstream scheme that makes fossil fuel producers or suppliers responsible for carbon content in the gases emitted, and they are also responsible for the ‘fuel sold to downstream consumers if they are not the participants in the EU ETS’(Sorrell, S: 2010). Thus the gas coverage depends on the presence of carbon content. Hence, the scheme includes the ‘oil refineries, oil and gas importers, and coal companies’(Sorrell, S: 2010). The companies who buy products from the above industries have to surrender an allowance for a certain amount of carbon contained in the fuel dealt by them. If not, they have to pay for the carbon that exists in the fuel sold for customers.

Thus these charges are similar to a carbon tax. However, this type of gas coverage is capable of leading to double regulation. Hence these types of schemes should make sure that the fuel acquired by EU ETS participants does not comprise the price of carbon allowances when they deal with upstream companies. In this regard, the scheme would require a ‘paper trail’(Sorrell, S: 2010). The paper trail helps in tracking fossil fuel sales along the supply chain. The supply chain includes wholesalers. The intermediary companies are also part of the chain. As the final consumers cannot be charged directly sometimes, it is necessary to charge the producers and the charges may be passed by them downstream. Hence, the gas coverage that should be a charge has to be decided at the stage of producers of fossil fuels and their refining units. The downstream customers can only be charged if they reprocess the purchased fuels and the gases emitted are covered under the scheme and ETS (Sorrell, S: 2010).8

Permit Allocation

The levying of the charges or the allowances given to the firms mentioned in the ‘gas coverage’ chapter needs a permit allocation policy. This can be done by integrating the potential benefits with environmental protection as well as with ‘equity and individual engagement’ (Eyre, N: 2010). Eyre, N (2010) quotes the ‘UK Secretary of state for the Department of Environment, Food and Rural Affairs (DEFRA) David Miliband’(Eyre, N: 2010) proposed the investigation of PCT as a potential option that can serve the purpose. A committee of House of Commons regarding environment audit has decided that the cost-effectiveness depends on the extent to which the PCT is more effective than upstream pricing mechanisms and thus involves permit allocation with ‘cap and trade’ scheme combined with upstream allocation. The concept of the carbon tax also has been contemplated. However, Eyre, N (2010) cites Starkey and Anderson (2005), Roberts and Thumim (2006) about the permit flow and its allocation. One important aspect that affects the permit allocation is to exclude the emissions due to the personal use of electricity by individuals.

Hence, the emissions due to electricity produced by firms for domestic use can be exempted from the pricing or charging. For this purpose, it is necessary to give permissions to the electricity generating companies in a selective manner so that the electricity produced for domestic and commercial purposes can be separated. That means a policy should be implemented regarding electricity-producing firms to classify the power generated by them according to domestic and commercial use. The total power generated and consumed need to be audited and the percentage of power used for commercial purposes should be charged to the electricity generation companies accordingly. This process should include the allocation of permits and allowances. The allocation of permits is about the amount of electricity generated for commercial purposes as well as for domestic usage. After the allocation of permits, the allowances should be given in the form of permits to produce the electricity for domestic purposes so that no charges are levied for that production. Hence, it can be understood that the more the reduction of emissions, the greater the allowances that allow the production of electricity for domestic purposes as it is liable for no charges (Eyre, N: (2010).9

To understand the permit allocation procedures, the simulated policies and their effects in Spain can be studied. The policies are part of EU ETS. The permit allocation has been done according to ‘burden-sharing agreement allocation’ (Labandeira, X., & Rodrã­guez, M: 2010) to Spain and the country has the target of reducing the emissions to 16 percent of 1990 level by 2012. The policy of Spain has simulations assuming the isolated Spanish market with that of other EU countries. The size of reduced emissions is compared here. Hence, Labandeira, X., & Rodrã­guez, M (2010) explains that this policy produces a higher permit price, but the distributional and efficiency effects are more as the allowances can be gained at the end of 2012 by reducing the emissions. Hence, the permit allocation in Spain has stricter emission restraint when compared to other countries. To understand the permit in this context the first simulation, which is ‘real market’ needs explanation. This involves the grandfathered allocation of permits.

The second simulation is regarding the functioning of emission trading directives given to various sectors. The households are kept out of this simulation. This simulation comprises a wide market as the number of companies and industries are large in number. The third simulation is regarding the auction of all permits by the government. The buyer of the allowances has to incur extra costs in production and thus the base cost decided for the auction of the allowances should be in a manner to discourage the ignorance of reduction targets by companies by buying the allowances in the auction. Spain did so by achieving the primary purpose of the second simulation by analyzing efficiency costs according to the narrow nature of EU ETS and fixing the price of allowances to make it difficult for companies to be cost-effective if they buy them in the auction. The results of this policy are encouraging as there is a possibility of a reduction of unregulated emissions by 44.5 percent. This can be made possible when the Spain government or the regulator concentrates on the small number of emitters that emit a large number of gases to reach ’16 percent reductions in emissions to comply with the burden-sharing agreement’ (Labandeira, X., & Rodrã­guez, M: 2010).10

Grandfathering Vs Auctioning

One important aspect that limited the efficiency of the ETS is grandfathering. As there is the option of allocating emission allowances based on the previous performance, the companies which are efficient in reducing the emissions may get allowances and may not perform as well as the previous years based on which performance, they got the allowances. The absence of auctioning of allowances may delay the achievement of reduction targets as after a successful year of reducing emissions the individual companies prefer to get allowances and may decrease their efficiency regarding the reduction of GHG. This also resulted in power generators passing the extra costs on the consumers and pocketing the cash. Had there exists auctioning for allocation of allowances, they have to buy them and restriction about the passage of the extra costs to the end-user can also prompt the companies to reduce emissions cost-effectively and the necessity of buying the allowance may force them to continue in reducing the emissions in the consequent years. In this regard, Donehower, J (2008)explains that ‘in contrast to grandfathering, auctioning allows for greater price transparency, levels the playing field between old and new entrants, encourages the cost-effective allocation of permits'(Donehower, J: 2008).

As the auctioning of allowances to the individual companies is not capable of creating a windfall of profits in the year after successful reduction of emissions, the conservation aspect of climate change policies of governments can be achieved. The free allocation of allowances after a period of successful reduction of emissions cannot raise money for further conservation efforts and also results in an increase of emissions in the later years of implementing a particular plan. However, the ETS has been successful in creating a strong framework for a multinational emission trading scheme. This has been done by ‘allowing companies to learn how to operate in a carbon-restricted economy’(Donehower, J: 2008). However, the grandfathering option in ETS and meager fines for noncompliance is deemed politically necessary to get the scheme launched. In the next stage, the policy of grandfathering need to be decreased and the auctioning of the allowances should be increased so that the buying costs of the allowances do not allow the companies to be cost-efficient. The governments of participant countries should make regulations in such a way that the companies which buy allowances should not pass the increased cost of the product to their consumers (Donehower, J: 2008).11

Various Protocols and Acts that Affect Climate Change and Legal Issues

The trading system which is the essence of ETS schemes concentrates on the reduction of global warming by reducing the emission of GHG. Regarding that aspect, Haites, E., & Mehling, M (2009) mentions California’s global warming solutions act of 2006. This has set an enforceable target of reducing the GHG to 1990 levels by 2020-25. The California Air Resources Board (CARB) is responsible for adopting measures. The act allows use the of market mechanisms to achieve the target of reduction of GHG and thus reducing global warming. The same type of legislation has been passed by British Columbia also in 2008 to enable the implementation of the GHG trading scheme. The act adopts stipulated units from other schemes that are acceptable as recognized compliance units (RCUs). This involves carbon tax and the companies which use fossil fuels have to pay it. The act has the provision of refunding the tax on fossil fuels to avoid double taxation in certain sales of the companies (Haites, E., & Mehling, M: 2009).12

The allowances aspect brings forth the different protocols and acts that were made to slow down climate change. One such agreement is the General Agreement on Trade in Services (GATS), which does not allow discrimination in allowing foreign services. When different protocols that restrain the emission of gases may be related to energy-related services and may the allowances for fossil fuels may be demanded at the border and may result in quantitative restrictions. Hence, to be compliant with international agreements and simultaneously to achieve the emission reductions, ETS had come into existence. The ETS should not violate WTO rules of non-discrimination. Jacob Werksman (2001, p.156) there exist some protocols that may challenge WTO rules but still survive if they qualify for a general exception under GATT or GATS. That is why the ‘multilateral environment agreements (MEAs) have employed trade-related measures’(Jacob Werksman: 2001, 156).

As a result, the emission allowances that involve private entities need the transfer of partly assigned amounts (PAA). Jacob Werksman (2001, 160) states that ‘the transfer of an emission allowance and the transfer of an equivalent PAA may occur in advance or simultaneously, as the transferring party authorizes the ‘export’ of the allowance’ (Jacob Werksman: 2001, 160). Thus a private entity may not acquire hold or transfer a PAA as they are not subjects of the international law. As a result, they cannot hold international legal rights in the form of allowances. They can only hold or transfer the emission allowances, which are valid under domestic law. Regarding this aspect, the Montreal protocol can be mentioned in which the industrial rationalization provisions exist. These provisions prompted the domestic legal regimes in the member countries to enable the issue of environmental permits by governments to be the precedents in international trade that connect the trade of services and products with emission trading systems (Jacob Werksman: 2001, 156-168).

The Kyoto protocol provides an option for investments in climate-friendly project activities. Claudia Santoro (2001, 193) states that article 12 of the Kyoto Protocol provides an opportunity to have a system on the lines of a clean development mechanism (CDM) so that the rules and regulations operate under the supervision of the conference of parties of the protocol. The CDM has to offer incentives for emission reductions. As CDM involves the bilateral agreements between nations, a protocol is necessary between participant nations to decide the basis and compliance of the home country of manufacturers and service providers when they try to enter a foreign nation (Claudia Santoro: 2001, 191-196).13 Hence, cooperation across national borders is necessary for the context of common geographical features like European countries or countries like the USA, Canada, and Mexico. The close economic ties, as well as shared political institutions, also help in the climate policy of the nations. The North American Free Trade Agreement can help in divergent approaches to greenhouse gas mitigation so that it also results in industrial relocation. The agreements like NAFTA can also decide the economic links and in this context, Haites, E., & Mehling, M (2009) states that the regional policy initiatives by US states have attracted Canadian provinces. Mexican states also responded to US climate policy initiatives.

Thus all three countries have proposed schemes that overlap between national and state as well as provincial schemes. In this regard, Mexico’s emissions trading initiatives are limited. They only try to ‘establish binding emission caps with trading for cement and oil refining by 2012 and informal statements expressing a desire to eventually become part of a North American Emissions Trading Scheme’(Haites, E., & Mehling, Mthe: 2009). As, the gas emissions in all the three important countries in North America; USA, Canada and Mexico increased from 1990 to 2005, the regional emissions trading schemes have been launched by the states and provinces. They are ‘regional greenhouse gas initiative (RGGI), the Western Climate Initiative (WCI) and the Midwestern Regional GHG reduction Accord (MGGA)’(Haites, E., & Mehling, M: 2009). In this regard, it is important to mention the adoption of a climate change action plan by five eastern provinces of Canada and six New England states of the USA to reduce regional greenhouse gas emissions to 1990 levels by 2010. For example, Alberta has ‘implemented an emission trading scheme that took effect on 1st July 2007. According to that ETS, the industrial facilities that emit more than 100,000 tonnes of greenhouse gases per year must reduce their emission intensity by 12 percent’(’ (Haites, E., & Mehling, M: 2009). However, this scheme has no provision for a link to other ETSs. As a result, it may deter other schemes from linking to the Alberta scheme. Consequently, an agreement on the lines of NAFTA is necessary to link different ETSs in a region, and EU ETS and US ETS are good examples for that (Haites, E., & Mehling, M: 2009).14

According to Gilpin, A (1999, 154) the ‘US emission trading program was introduced into the USA in the early 1980s in an attempt to introduce some free-market principles into the use of environmental resources’(Gilpin, A: 1999, 154). As per that ETS, the US EPA will fix the amount of pollution-causing gases emitted by industries in a particular region. For example ‘sulfur credits are traded in Chicago board of Trade’(Environment Reporter 28: August 1992). After that, both the USA and Canadian governments introduced Clean Air Act amendments in 1990 to reduce acid rain. This has been known as the Acid Rain Program. The primary goal of the reduction of annual SO2 emissions had been incorporated in title IV of the act. According to that, the target is to achieve a reduction of up to 10 million tons below 1980 levels by the year 2000. The program also aims at the reduction of emissions of oxides of nitrogen from the plants that utilize electricity (Gilpin, A: 1999, 154).15

The acts in the US about climate change are due to the rejection of the Kyoto protocol by that country. Diener, S. L (2006) explains that ‘before President Clinton signed the Kyoto Protocol in 1998, the Senate unanimously passed the 1997 Byrd-Hagel resolution that emphasized both the environmental impact of developing nations’ emissions'(Diener, S. L: (2006). The resolution stressed the point that the environmental impact of developing nations’ emissions may surpass those of the United States of America by 2015. As a result, the lawmakers feared that their country may face loss due to the international regulatory regime over climate change. After Bush was elected, the government made the clean air act (CAA) that has points in compliance with UNFCCC. Along with CAA new source review permit program (NSR) was made but Carbon dioxide, which is termed as a greenhouse gas is not a pollutant under CAA, but it is under NSR.

Hence, to contain the emissions of carbon dioxide it is compulsory for ‘coal-burning plants to utilize the integrated gasification combined cycle (IGCC) technology to curb emissions’(Diener, S. L: 2006). CAA is useful in making economy-wide emission regulations if EPA classifies greenhouse gases as air pollutants in the USA. In 1999 when EPA testified that it has pre-existing legal authority under CAA to regulate carbon dioxide, that gas has been termed as a pollutant in the US along with Sulphur dioxide, nitrogen dioxide, and mercury. As per the CAA norms, carbon dioxide can be termed as a pollutant as the act states that an air pollutant is the one ‘which is emitted into or otherwise enters the ambient air, surrounding any predecessor to the formation of any air pollutant’ (Diener, S. L: 2006). However, again in 2003, the EPA determined that CO2 is not a CAA pollutant and beyond its regulatory regime. Though EPA did not recognize CO2 as a pollutant, Massachusetts in 2001, New Hampshire in 2002, and Colorado in 2004 have approved to ‘derive 10% of their power from renewable sources by 2015′(Diener, S. L: 2006).

Similarly, the governments in the states of Australia are in the process of developing a national carbon trading scheme. Though the commonwealth government is opposing the domestic emissions’ trading, governments proposed a national emission trading scheme (NETS), and the states and territories are developing a ‘collaborative national carbon trading scheme’(Ayers, C: 2006). The sub-national governments in Australia can participate in global issues and institutions. This has challenged both Australian and international politics but global forces have encouraged sub-national activism. These types of international activities resulted in the ‘announcement of Asia-pacific partnership on clean development and climate in 28th July 2005 by USA, Australia, China, Japan, India, and South Korea’ (Ayers, C: 2006). Though the above ‘nations are not engaged with the Kyoto Protocol, the Asia pacific partnership is to address climate change as well as energy security'(Ayers, C: 2006).

South Korea’s National Emission Trading Scheme

Regarding Asia Pacific initiatives, it is important to mention South Korea’s national emission trading scheme first. Regarding this aspect, Business Green Staff (2011) mentions South Korea’s long-awaited emissions cap and trade scheme. A news article published on ‘’ states that the cap and trade scheme of South Korea will come into effect from 2015. The Business Green com staff cite ‘The Korea Economic Daily’ which reported that the ‘government is poised to present a revised carbon trading bill that will essentially water down previous proposals following intense lobbying from industry groups’(Business Green Staff: 2011). However, the bill still needs parliament approval but once approved will come into effect from 2015 with increased carbon allowances. The increase of carbon allowances is to reduce burdens on companies.

The report of ‘’ states that free allowances may be expected to ‘rise from 90 to 95 percent of all allowances’(Business Green Staff: 2011). The act makes South Korea’s government invest over 80 percent of its economic stimulus package in low carbon projects. This is due to commitments to cut emission by 30 percent against business as usual levels by 2020’ (Business Green Staff: 2011). Due to the 30 percent reduction target, the industry did not support the scheme for a long time and that delayed its implementation not only by two years but also included the clause of the increase of carbon allowances thus reducing the target of reduction of carbon dioxide in the later stages of the program as the successful companies in the initial years may get carbon allowances in the later period. The reason they have shown us that South Korea’s export-oriented economy would be put at a competitive disadvantage (Business Green Staff: 2011).

As a result, there are some significant differences in the bill when it has been compared to original plans proposed in 2010. Whatever may be the plan and the number of reductions of emissions, it can be termed as ‘Asia’s first national carbon trading scheme’(Business Green Staff: 2011). The national carbon trading scheme has its roots in a green new deal announced by South Korea in 2009. The green new deal has proposed a benchmark for low carbon economic growth around the world. However, as South Korea is a country that relies on exports to boost its economy, the global recession resulted in a decrease in emissions to increase the competence of the domestic companies in the international market. When it comes to the reason for having an emission trading scheme at the national level, the government has tossed with the idea of low carbon technologies all over the world. However, when the international community did not respond to its high targets of reduction of carbon emissions, the government changed it to a cap-and-trade scheme at a later stage. This cap and trade scheme is to foster the nascent green sector and the government has planned to create 10 million new jobs in four years.

These proposals are due to the recovery of ‘South Korea’s manufacturing and export markets’ (Business Green Staff: 2011) and d they argued for the protection of existing jobs. Hence, the government relied on protecting the present jobs rather than creating new ones. Another thing that resulted in outrage in business leaders is the estimated cost of cap and trade measures. It has been estimated at 1.5 percent of the country’s GDP, and that did not garner the support of business leaders. As a result, the government has watered down the bill and also delayed it by two years by decreasing the cost on the business by increasing the carbon allowances (Business Green Staff: 2011).16 To compare the South Korean National emissions trading scheme, California’s cap and trade scheme can be discussed. The ‘California’s Air resources board (CARB) has adopted regulations for the USA’s largest cap and trade scheme on 16 December 2010’(Business Green Staff: 2011). The bill’s name is Assembly bill 32 and is also known as AB32. ‘It defines global warming as a “serious threat to the economic well being, public health, natural resources, and the environment of California” and as a result sets a legally binding target of reducing greenhouse gas emissions in the state to 1990 levels by 2020’(Business Green Staff: 2011). To do so the reductions should be 25 percent in carbon dioxide emissions between 2008 and 2020. To achieve this the cap and trade scheme of California had lower emission vehicles as well as renewable electricity projects. The energy efficiency designs for these projects help in achieving the targets. Hence, this is a market-based compliance mechanism.

Even though it has to comply with the regulations, the cap and trade scheme has been preferred against ‘carbon fee’ because of emissions reductions proposed over electricity generation as well as industrial sectors. These emissions account for 61 percent of the state’s total emissions. The state is 2nd largest emitter of greenhouse gases after Texas and the 12th largest greenhouse gas emitter in the world, the cap and trade scheme has introduced some harsher measures. This made critics of this program in the US argue that it may damage the economy and increase unemployment. However, there are supporters too for this act. They insist that the program is capable of creating clean tech jobs and also can increase competitiveness. The prospect of creating clean tech jobs ultimately provided the foundation for a national pricing mechanism. Unlike the South Korean emissions trading scheme, California’s scheme comes into being by 2012. As per the targets set up in the program, 85 percent of emissions should be covered by the program by 2015. In 2012, that target is to restrict carbon dioxide emissions to 165.5 million tonnes. After that every year the reduction of emissions has to be further decreased by two percent a year until 2015, thus making the emissions of carbon 334 million tonnes by 2020. The companies that come under the cap and trade scheme are ‘electricity generators, refineries, cement, paper, and glass facilities’ (Business Green Staff: 2011).17

What does China say regarding Climate Change and CO2 emissions?

According to Wang, T., & Watson, J (2008) ‘the rise of China as a global trading power has led to tensions with the EU and the USA over competitiveness and safety issues’ (Wang, T., & Watson, J: 2008). As China is believed to be the world’s largest emitter of carbon dioxide, the attitude of China is crucial for the success of the efforts to avoid environmental pollution at the international level. Though the view of the Chinese government is more serious and open, it refuses to accept the cap on carbon emissions. The reason is that it believes that the industrial nations are responsible for the situation that exists today. Moreover, China argues that most of the emissions that occur on their soil are due to the production of goods that are being exported to Western countries. However, the Western countries argue that due to these emissions China’s trade surplus has grown remarkably from 2004 onwards. As a result, the ‘consumption-based national emissions’ (Wang, T., & Watson, J: 2008) has gained momentum in the arguments regarding carbon caps for different countries.

The case of China can be compared with Norway and some OECD countries as the emissions in their countries are due to exports. Hence, China along with other developing countries argues in the favor of consumption-based national emissions accounting (Wang, T., & Watson, J: 2008).18 Though China is the biggest emitter of carbon dioxide, it is ‘now the world’s second-largest energy consumer’ (Wang, T., & Watson, J; 2008) after the United States of America. However, its per capita consumption is approximately 10 times lesser than that of the United States of America and European countries. Hence, it is necessary to give compensation to China and it can be possible with ‘transferable emission rights’(Carliner, G: 1995). The transferable rights are the ones that would allocate quotas to countries to emit GHG. The total amount of emissions has to be set by international agreement and the quotas can be given to different countries depending on their emission reductions in the previous years. As compensation to the countries like China, the quotas can be allocated based on per capita consumption, so that China can get more quotas for having less per capita consumption than Western countries (Carliner, G: 1995).19

India’s Energy Efficiency Scheme

Like China, the case of India also is about less per capita consumption, which is far lesser than the United States of America and other Western countries. Hence, India is also arguing on the same basis of per capita consumption in international forums regarding climate change, as does China. In addition to that India is concentrating on energy efficiency, which reduces the emissions for the same productivity. Sreenivasamurthy, U (2009) states that the ‘Indian iron and steel sector grew at over seven percent per annum in 2005-07 (MoS, 2008) and accounts for nearly 10 percent of country’s carbon dioxide emissions (Garg et al., 2006)’ (Sreenivasamurthy, U: 2009). As a result, the analysis of primary steel production in India has shown that the energy efficiency of the units is far less than the OECD average according to a report of IEA (2007). The CO2 emission intensity levels are still 50-75 percent behind the OECD average. The analysis also identified the following reasons. ‘small plant size, the emergence of small-scale coal-based DRI units, and a large contribution from old public-sector units’ (Sreenivasamurthy, U: 2009). One more reason is that the firms in India still invest in ‘inefficient coal-based DRI process and are averse to taking up many of the potential energy efficiency measures’ (Sreenivasamurthy, U: 2009) as they are costlier than the present methods. Hence, in this context, the Bali Roadmap (UNFCCC, 2008) explains that cooperative sectoral approaches, as well as sector sensitive actions, are necessary to increase energy efficiency as well as cost-effectiveness. These activities should be promoted on a national basis in countries like India to prompt their industries to implement low-carbon production processes (Sreenivasamurthy, U: (2009).20


After a review of different ETSs and the policies of various countries, one can understand that no agreement or protocol has been accepted by all the parties or the countries in the world. While the largest emitter of Greenhouse gases the United States of America is insisting on China and India to comply with the Kyoto Protocol, these countries stress that the per capita consumption should be addressed before setting emission targets. Hence, a broad consensus is necessary to frame an international policy that reduces emissions. Though there is no such policy as of now, the emission trading schemes of various countries may lead to a common emission trading scheme worldwide in the future.

Reference List

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Business Green Staff. (2011). South Korea carbon trading scheme to launch in 2015.  Web.

Business Green Staff. (2011). The Ultimate Guide to South Korea’s cap-and-trade scheme.. Web.

Business Green Staff. (2011). The Ultimate Guide to California’s cap and trade scheme.  Web.

Carliner, G. (1995). The China Card: Global Warming?. Challenge, 38(5), 57+. Web.

Claudia Santoro. (2001). Investing in Sustainable Development: The Potential Interaction between the Kyoto Protocol and the Multilateral Agreement on Investment. In In Inter-Linkages: The Kyoto Protocol and the International Trade and Investment Regimes. New York: United Nations University Press. p.191-196.

Department of Trade and Industry. (2006). UK Emissions and Trading Scheme. Web.

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Eyre, N. (2010). Policing Carbon: Design and Enforcement Options for Personal Carbon Trading. Climate Policy, 10(4), 432+. Web.

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Global Climate Change. N.d. Web.

Grubb Michael. (2009). Climate Policy and Industrial Competitiveness: Ten Insights from Europe on the EU Emissions Trading System. The German Marshall Fund of the United States. Washington DC;USA. P.8-10.

Haites, E., & Mehling, M. (2009). Linking Existing and Proposed Ghg Emissions Trading Schemes in North America. Climate Policy, 9(4), 373+. Web.

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Wang, T., & Watson, J. (2008). China’s Carbon Emissions and International Trade: Implications for Post-2012 Policy. Climate Policy, 8(6), 577+. Web.


  1. Jody Freeman & Charles D. Kolstad. (2007). Prescriptive Environmental Regulations versus Market-Based Incentives. In ‘Moving to Markets in Environmental Regulation: Lessons from Twenty Years of Experience’. Oxford University Press. New York: USA. P.3-5
  2. Global Climate Change. N.d. Web.
  3. Department of Trade and Industry. (2006). UK Emissions and Trading Scheme. Web.
  4. Michael Grubb. (2009). Climate Policy and Industrial Competitiveness: Ten Insights from Europe on the EU Emissions Trading System. The German Marshall Fund of the United States. Washington DC; USA. P.8-10.
  5. EPA. (2002). Clearing the Air. Office of Air and Radiation; Clean Air Markets Division. P.2-5
  6. Stephen Smith., Joseph Swierzbinski. (2007). Assessing the performance of the UK Emissions Trading Scheme. In Environ Resource Econ. Volume 37. P.131-158.
  7. Richard Schmalensee., Paul L. Josklow., A. Denny Ellerman., Juan Pablo Montero & Elizabeth M. Bailey. (2000). An Interim Evaluation of Sulfur Dioxide Emissions Trading. In ‘Journal of Economic Perspectives’. Vanderbilt University: USA. P.56-58.
  8. Sorrell, S. (2010). An Upstream Alternative to Personal Carbon Trading. Climate Policy, 10(4), 481+. Web.
  9. Eyre, N. (2010). Policing Carbon: Design and Enforcement Options for Personal Carbon Trading. Climate Policy, 10(4), 432+. Web.
  10. Labandeira, X., & Rodrã­guez, M. (2010). Wide and Narrow Approaches to National Emission Policies: a Case Study of Spain. Climate Policy, 10(1), 51+. Web.
  11. Donehower, J. (2008). Analyzing Carbon Emissions Trading: A Potential Cost-Efficient Mechanism to Reduce Carbon Emissions. Environmental Law, 38(1), 177+. Web.
  12. Haites, E., & Mehling, M. (2009). Linking Existing and Proposed Ghg Emissions Trading Schemes in North America. Climate Policy, 9(4), 373+. Web.
  13. Claudia Santoro. (2001). Investing in Sustainable Development: The Potential Interaction between the Kyoto Protocol and the Multilateral Agreement on Investment. In Inter-Linkages: The Kyoto Protocol and the International Trade and Investment Regimes. New York: United Nations University Press. p.191-196.
  14. Haites, E., & Mehling, M. (2009). Linking Existing and Proposed Ghg Emissions Trading Schemes in North America. Climate Policy, 9(4), 373+. Web.
  15. Gilpin, A. (1999). Environmental Economics: A Critical Overview. Chichester, England: John Wiley & Sons.p.154.
  16. Business Green Staff. (2011). The Ultimate Guide to South Korea’s cap-and-trade scheme.. Web.
  17. Business Green Staff. (2011). The Ultimate Guide to California’s cap and trade scheme. Web.
  18. Wang, T., & Watson, J. (2008). China’s Carbon Emissions and International Trade: Implications for Post-2012 Policy. Climate Policy, 8(6), 577+. Web.
  19. Carliner, G. (1995). The China Card: Global Warming?. Challenge, 38(5), 57+. Web.
  20. Sreenivasamurthy, U. (2009). Domestic Climate Policy for the Indian Steel Sector. Climate Policy, 9(5), 517+. Web.