ABSTRACT
The scheme of tradable pollution permits is a market-driven policy that aims at self-regulation through reliance on private decision-making. It comprises an agreement of trade entered into between two or more parties to ensure that that they are both better off than they would have been had they complied with only the pollution permit awarded to them exclusively. 1 The permits are usually allocated by the government, ideally through an auction. 2 Irrespective of the initial distribution of permits, the parties attempt to arrive at an equitable bargain through a trade where everyone is better off, no one is worse off and the outcome is economically efficient. 3
The option of emissions trading is provided for within Article 17 of the Protocol. 4 Developed countries were assigned particular emission caps that they were required to comply with during the period between 2008 and 2012. This cap had been assigned based on a percentage of their emission levels, taken according to the base year 1990 or 1995, depending on the greenhouse gas in question. If, however, a country has made an assessment (in its own capacity and without
this period of compliance, the provision of emissions trading would allow it to purchase emission reduction credits from another country. 5 The latter country would make a determination of whether it would be able to reduce its emissions beyond the required cap and then sell its credits to the purchaser country accordingly. An emissions trading scheme therefore incentivizes countries to reduce their emissions beyond the required limit and to profit from the sale of credits to other countries, where the cost of emission reduction may be higher. Under this cap and trade program, both the purchaser and the seller country benefit from the overall reduced cost of emission reduction. 6
This mechanism has, however, been restricted within the Protocol to Annex I parties upon whom the obligations to reduce emissions are legally binding. An additional restriction that has been imposed upon parties engaging in this mechanism of carbon credit trading is that it must ‘be supplemental to domestic actions for the purpose of meeting quantified emission limitations and reduction commitments’. 7 The Protocol, however, does not seem to provide any clarification on the interpretation of the term ‘supplemental’, and this has been interpreted in myriad different ways by different countries.
