The U.S. SO2 (sulfur dioxide) Allowance Trading Program is the world's first large-scale application of a cap-and-trade system for limiting emissions, and it is often cited as an example for the control of other pollutants and of greenhouse gases. Drawing upon experience with this novel approach to emissions control since 1995, this article makes five observations that address common misunderstandings about emissions trading and that are applicable to the control of greenhouse gases. First, emissions trading did not compromise environmental effectiveness, and even enhanced it. Second, the program works because of the simplicity of the compliance requirement, the unavoidably strict accountability of the system and the complete flexibility given to emitting sources. All three go together to form what may be regarded as a virtuous circle. Third, despite fears to the contrary, allowance markets developed in response to trading opportunities. Fourth, the politics of allowance allocation can be helpful in overcoming objections to emission control measures. Finally, provisions for voluntary accession present problems of moral hazard that must be carefully considered.

© 2001 Revue de L'Energie