Nuts and bolts of pollution trading

The US withdrawal from the 1997 Kyoto Protocol on climate change may have been a political blow, but economically, it might make it easier for the 178 nations that stuck with the agreement in Bonn to achieve their individual emission-reduction targets.

The reason is the market for trading pollution permits, enabling countries to buy and sell pollution rights, as long as they keep within their total emissions targets. According to a recent report by the International Energy Agency, the US, as the source of about 25% of world emissions, would have been a major buyer of emissions credits on the world market. With the US in, the IEA puts the price of a ton of carbon at about $100.

With the Americans absent, the price could fall to about $10 or less. The absence of the United States may greatly reduce the environmental reach of the agreement struck in Bonn, but the emergence of emissions trading in itself is a major step forward, the IEA report says. The report translates into layman’s terms the highly technical language of the agreement reached in Bonn in July, from how emissions trading will work to claiming credits for “sinks” — land-use and forestry activities that absorb carbon dioxide from the atmosphere and which can be counted as credits. Bonn also laid down some ground rules on what happens when a country fails to meet its greenhouse gas reduction targets – it must “repay” them with a 30% extra penalty over the following target period, say, 2013 to 2017.

What Happened in Bonn? The Nuts and Bolts of an Historic Agreement, available on the IEA website: A print copy is available from IEA on request.

©OECD Observer No 228, September 2001 

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