Ecological Economics 31 1999 11 – 18
COMMENTARY
Should the rules of allocating emissions permits be harmonised?
Zhong Xiang Zhang
Faculties of Law and Economics, Uni6ersity of Groningen, P.O. Box
716
,
9700
AS Groningen, The Netherlands Received 13 July 1998; received in revised form 26 February 1999; accepted 12 March 1999
Abstract
The Kyoto Protocol is the first international environmental agreement that sets legally binding greenhouse gas emissions targets and timetables for Annex I countries. Its Article 17 authorizes emissions trading among Annex B
countries. If properly designed, emissions trading can effectively reduce their abatement costs, while assisting Annex I countries in achieving their Kyoto obligations. If Annex B governments elect to allocate the assigned amounts to
their individual sub-national legal entities and authorize them to trade on the international emissions permits market, I argue that individual governments should be left free to devise their own ways of allocating emissions permits.
© 1999 Elsevier Science B.V. All rights reserved.
Keywords
:
Carbon tax; Emissions trading; Greenhouse gases; International competitiveness www.elsevier.comlocateecolecon
1. Introduction
In the face of a potentially serious global cli- mate change problem, 160 countries eventually
reached an historical agreement on limiting green- house gas emissions in December 1997, Kyoto.
While the United Nations Framework Conven- tion on Climate Change UNFCCC at the Earth
Summit in
June 1992
committed Annex
I countries
1
to ‘aim’ to stabilize emissions of carbon dioxide CO
2
and other greenhouse gases at their 1990 levels by 2000, the so-called Kyoto Protocol
goes further. It sets legally binding emissions targets and timetables for these countries. To-
gether, Annex I countries must reduce their emis- sions of six greenhouse gases by 5.2 below 1990
levels over the commitment period 2008 – 2012, with the European Union, the United States US
and Japan required to reduce their emissions of such gases by 8, 7 and 6, respectively UN-
FCCC, 1997. This Protocol will become effective
Tel.: + 31-50-3636882; fax: + 31-50-3637101. E-mail address
:
z.x.zhangrechten.rug.nl Z.X. Zhang
1
Annex I countries refer to the Organisation for Economic Co-operation and Development OECD countries and countries
with economies in transition. These countries have committed themselves to legally binding greenhouse gas emissions targets.
0921-800999 - see front matter © 1999 Elsevier Science B.V. All rights reserved. PII: S 0 9 2 1 - 8 0 0 9 9 9 0 0 0 3 7 - 3
once it is ratified by at least 55 countries whose CO
2
emissions represent at least 55 of the total from Annex I countries in the year 1990.
The Kyoto Protocol also accepts the concept of emissions trading, under which one Annex B
country
2
or its sub-national entities would be allowed to purchase the rights to emit greenhouse
gases from other Annex B countries or their regu- lated entities that are able to cut greenhouse gas
emissions below their assigned amounts or their targets. Structured effectively, the market-based
emissions trading approach, pioneered in the US SO
2
allowance trading program Ellerman et al., 1997, can provide an economic incentive to cut
greenhouse gas emissions while also allowing flex- ibility for taking cost-effective actions. It is gener-
ally acknowledged that the inclusion of emissions trading in the Protocol is in line with the underly-
ing principles in Article 3.3 of the UNFCCC, which states ‘‘policies and measures to deal with
climate change should be cost-effective so as to ensure global benefits at the lowest possible cost’’,
and reflects an important decision to address cli- mate change issues through flexible market
mechanisms.
The decision on whether and how to allocate the assigned amounts to sub-national entities is
the first step towards trading among emissions sources as well as trading among countries. This
raises the competitiveness concern in the initial allocation of permits. Against this background,
this article examines whether there is the need for the harmonisation of allocation of permits.
2. Competitiveness concern in the allocation of permits
