There are many obstacles to the development of an international CO2 emissions trading system, but the biggest is a feature that is often assumed: the existence of a single national system. Once a national system is in place, an international system will develop naturally more as a matter of self-interested trade than as international agreement. Meeting the Kyoto targets will create a scarcity; and the scarcity requires that use and the associated rent be allocated somehow. This allocation--deciding who gets what--is a familiar problem and the largest impediment to the creation of a national system, and thus of an international regime of CO2 emissions trading. The paper reviews the various instruments by which such the Kyoto target might be met from the standpoint of the allocation of the scarce use and the associated rent. In particular, the paper emphasizes that existing users will largely continue to use the scarce resource and that they now actively exercise the incipient right to the proposed scarcity. Creation of the scarcity and the allocation of rights raise fundamental issues of equity that lie pre-eminently in the political realm. The author observes that the creation of the scarcity and the allocation of rights are fused and that agreement on one will occur only as there is agreement on the other. Nevertheless, such problems have been solved before --for land and for SO2 permits--although in both cases the conditions were easier than what is now proposed for CO2.An international CO2 trading system will develop from a national allowance system for the same reasons that trading can be expected to occur domestically. However, the unavoidable requirement of certification and verification will impede access to non-Annex B sources of emission reduction, and at the same time encourage countries with such sources to accept Annex B limits. The negotiation of such limits raises the same problems of allocation as faced at the national level, only on a global scale; and there is even less agreement here. Nevertheless, the discussion on global allocation will not begin in earnest until a national system creates the trade opportunities that will make an Annex B limit worth pursuing. The development of an international system for CO2 emissions trading should not be expected to be either quick or easy, but to occur only by accretion and mostly as a matter of self-interested trade.

Copyright American Council for Capital Formation Center for Policy