Greenhouse gas emissions trading in the EU: building the world's largest cap-and-trade scheme

Introduction Economists regard control of greenhouse gas emissions as a natural application for tradable allowances. While the most important existing cap-and-trade scheme – the Sulfur Allowance Scheme in the United States – is largely based on the notion that location does matter, greenhouse gases are uniformly mixed pollutants at the global scale, i.e. the time and place of the emissions does not matter from an environmental point of view. At the same time it is relatively uncontroversial, although subject to some scientific uncertainty, to fix conversion rates between the different greenhouse gases, thereby enabling the establishment of an emissions trading scheme for all greenhouse gases. However, the framing of international climate change policy – most importantly in setting targets – is a crucial precondition for the implementation of cap-and-trade allowance schemes. This process has turned out to be very cumbersome so far and has rendered a global company-based greenhouse gas emissions trading scheme a distant objective. While climate change was put on the radar screen as a major environmental problem some two decades ago, the incomplete international institutional governance structure has so far allowed only limited progress. The UN Framework Convention on Climate Change, agreed in 1992, contains only non-binding commitments for the industrialized world. The Kyoto Protocol, agreed in 1997, contains legally binding targets for the same set of countries plus the transition economies in Central and Eastern Europe and some successor countries of the former Soviet Union.