CO2 Tradeable Permits (CO2TRADE)

          CASE NUMBER:        172            
          CASE MNEMONIC:      CO2TRADE
          CASE NAME:          CO2 Tradeable Permits

A.   IDENTIFICATION

1.   The Issue
     While the debate over global warming continues, efforts have
been underway to address the policy problems of instituting
changes necessary to remedy possible damage to the environment
associated with the greenhouse effect.  The principal greenhouse
gas tied to global warming is CO2 and the bulk of scientific
research has been devoted to dealing with this source of
pollution.  Because most of the world's energy comes from the
burning of fossil fuels any measure directed at abating CO2
emissions would be costly to the global economy.  Of the various
solutions proposed to control the emission of CO2 the concept of
tradeable permits has attained widespread recognition as the best
policy option.  Member nations of the OECD have been at the
forefront of designing and negotiating a multilateral CO2
abatement agreement; noteably the United States has taken a
leadership role in pressing forward with such planning.  A CO2
tradeable permit regime is far from being in place but much
progress has taken place in the research and development of the
idea.  Individual countries have implemented their own CO2
abatement programs and these unilateral actions provide the model
for an international agreement.

2.   Description
     In the late 1980s, global warming made headlines around the
world.  The crisis engendered predictions that "forests will
shift northward; sea-levels will rise, inundating wetlands,
beaches and coastal cities; rainfall patterns will change; air
pollution will worsen; and catastrophes such as plagues, floods,
and droughts will increase" (Shaw, 1990, p. 161).  Concern over
the ramifications of global warming elicited recommendations from
the scientific community on reducing the emissions of "greenhouse
gases."  One of the chief greenhouse gases, CO2, was a central
target of such proposed abatement programs.

Table 1: Contribution of different gasses to total radiative
change during the 1980s, Btons CO2eq.
_________________________________________________________________
Source              Industrialized Developing
Fossil CO2		14.2		 6.8
CFCs			  3.7		 0.4
Agricultural Methane  1.4     		 2.6
Fossil Methane		  0.9		 0.5
Landuse CO2		 ----		 6.9
Total (Btons CO2eq)	20.2		17.2
_________________________________________________________________
Source: Grubb, 1994, p. 287.

     Global warming is a transboundary problem that requires
multilateral action on the part of all countries in the world.  A
cooperative agreement among the world's nations to reduce CO2
emissions would be an optimal policy response.  The history of
attempts at implementing such a policy, however, has been fraught
with disagreement.  A CO2 abatement program would have
substantial impact on the world's largest industries, and land
use policies particularly in developing countries; such a regime
could affect trade flows, and change patterns of economic
development.  While most OECD countries have committed themselves
to stabilizing carbon emissions at 1990 levels by the year 2000,
most non-OECD countries are hesistant because they see such a
regime as an impediment to their development (Larsen, 1994, p.
841).  Prospects for an international treaty on abating CO2
emissions are uncertain.  The debate is on-going among OECD
countries and in the UN, with organizations such as UNCTAD and
UNCED continually conducting studies as to the feasibility of a
tradeable permit scheme for CO2 emissions (Grubb, 1994, p. 300).
     A tradeable permit scheme for CO2 emissions is a market
oriented approach to environmental control.  This policy is based
on the economic concept known as the marketable emission permit. 
It is a theory that has been applied in the U.S. in various EPA
programs and regulations such as the Emissions Trading Program in
which the offset policy, bubble policy, and the concept of
emissions banking has been tested (Tietenberg, 1994, pp. 21-22). 
The purpose of a tradeable emissions permit regime is to limit
aggregate emissions to a targeted level.  Once negotiations
between participating nations have defined an overall target for
emissions, permits are allocated equal to this total. 
Participating countries would then have to limit their emissions
to equal the permits that they hold.  If a country emits beyond
its permit allocation, then it would have to obtain permits from
others that have permits to spare, through bilateral trading.

3.   Related Cases

     USCARTAX   US Auto Taxes.
     ECCO2      Europe CO2 Limits.
     SST        SST Ozone Problem.
     COAL       Coal Trade.
     CFC        CFC/Green Refrig.
     Keyword Clusters    
     (1): Trade Product            = Fossil Fuels [COAL],
                                        [OILGAS], [UTIL], [WOOD],
                                        [PETROL], ETC.
     (2): Forum and Scope          = OECD et. al. [MULTI].
     (3): Environmental Problem    = Global Warming [GWARM].

4.   Draft Author: Du Tran.

B.   LEGAL Clusters

5.   Discourse and Status:  DISagreement and INPROGress
     The scientific issues on global warming are multifaceted and
the discourse on the problem is still contentious.  There is,
however, a consensus that the amount of CO2 in the atmosphere is
increasing and that global temperatures have been rising (Shaw,
1990, p. 162).  What that means in relation to global warming is
disputed on several points.  Some scientists contend that global
warming is not due to greenhouse gases but rather due to an
episodic weather phenomonon known as El Nino.  Other researchers
point to the connection between phytoplankton and CO2, and the
isolated trends of temperature rise to dispute the severity of
global warming.  A go-slow approach is recommended by this side
of the debate.  Despite scientific uncertainties, the basic
theory of global warming has warranted widespread examination of
policy options designed to mitigate the possible environmental
damage from global warming.  Proponents of immediate action have
called on policy-makers to "begin an active collaboration to
explore the effectiveness of alternatives and adjustments"
(Epstein, 1990, p. 1).  This has spurred research and development
of a CO2 tradeable permits regime.  As noted above, the question
of equity based on the North-South debate has been a central
impediment to an international agreement.  The question of equity
is focused on the allocation of proposed emission permits, i.e.
who should pay for the abatement of CO2 in the atmosphere.
     Individual countries or regional groups within the OECD have
already declared targets to limit emissions, and an international
treaty is expected to be based on these national programs.  The
sticking point to a global agreement hinges on the allocation of
permits to each country.  Allocation options include permits
issued by population, by GDP, by a combination of population and
GDP, by non-OECD projected emissions, and by OECD member
countries only (Larsen, 1994, pp. 846-852).  Economic analyses of
these options by Larsen and Shah (1994) show that allocation by
population, and GDP are unacceptable.  They suggest that non-OECD
countries should be allocated permits equal to their projected
emissions, and OECD countries should be allocated permits equal
to the world emissions target minus the permit allocations to the
non-OECD countries.  Table 2 below lists the permit allocation
rules and their rationales.  Until the negotiations on this
aspect of an international treaty on CO2 tradeable permits are
completed, the likelihood of a global regime is small.

Table 2: Proposed Allocation Rules.
_________________________________________________________________
RULE
1. Negotiate a global limit on CO2 emissions, and allocate this
limit on the basis of CO2 emissions per capita.

RATIONALE
"The moral principle is simple, namely that every human being has
an equal right to the use of atmospheric resource.  The economic
principle follows directly--those who exceed their entitlement
should pay for doing so.  The practical effect is obvious: it would
require the industrialized world, with high per capita energy
consumption, to assist the developing world with efficient
technology and technical services" Grubb (1989, p. 37).
_________________________________________________________________
RULE
2. Negotiate a global limit on CO2 emissions, and allocate limit on
basis of CO2 emission per unit of GNP.

RATIONALE
" . . . carbon emissions are tied to economic activity and the
objective should be to maximize the efficiency of economic
production" (Grubb, 1990, p. 36).  Grubb argues that measurement of
GNP would pose a problem, although Pearce (1990) maintains that
countries already agree on the basis of GNP measures through the UN
statistical system.  Both Grubb and Pearce argue that this rule
would discriminate against poor countries.  Grubb (1990, p. 36)
refers to the rule as "an untenable position."
_________________________________________________________________
RULE
3. Uniform percentage reduction in emissions.

RATIONALE
Minimal disruption to status quo ante, and hence, involves smaller
transfers.  Common rule used in other international environmental
agreements.  Criticized by Grubb (1990, p. 36) on the basis that it
would "reward the countries which are currently the most
polluting."
_________________________________________________________________
RULE
4. Allocate permits to poor countries.

RATIONALE
"Since the world's rich are the chief polluters of the atmosphere,
there are strong equity (and some efficiency) grounds for
allocating entitlements initially to the world's poor, so that the
necessary purchase of entitlements by the world's polluters would
generate a financial flow from rich to poor, hopefully providing
resources to encourage development of the poor countries" (Betram
et al., 1989, p. 14).
_________________________________________________________________
RULE
5. Allocate permits in inverse proportion to per capita consumption
of fossil fuels.

RATIONALE
"This would directly reward those countries which moved seriously
to renewable energy, while at the same time helping countries with
low levels of development, and hence low total energy consumption"
(Betram et al., 1989, p. 15).
_________________________________________________________________
RULE
6. Chose an overall level of cost to be borne by all countries, and
then set each country's emission reduction so that abatement cost,
relative to pre-control income is the same for all countries.

RATIONALE
Based on "Ability to Pay" Principle (Butraw and Toman, 1991).
_________________________________________________________________
RULE
7. Choose and overall level of cost to be borne by all countries,
and allocate this cost such that abatement cost relative to
pre-control emissions is the same for all countries

RATIONALE
Based on "Polluter Pays" Principle (Butraw and Toman, 1991).
_________________________________________________________________
Source: OECD, 1991, p. 27.

6.   Forum and Scope:  OECD, et. al. and MULTIlateral.

7.   Decision Breadth:  175.

8.   Legal Standing:  TREATY and LAW.
     An international agreement on the abatement of carbon
emissions in the form of a CO2 tradeable permit regime would be
institutionalized in a multilateral treaty.  Signatories would
implement the treaty at the national law level.  Trading or
purchasing of allocated permits would be handled bilaterally
between member nations of the treaty.  Enforcement of the treaty
regime could be handled by an intergovernmental monitoring
organization.  Disputes between sovereign states would most
likely be adjudicated in an international forum similar to the
World Trade Organization (WTO).  Under the Uraguay Round
Agreement of the GATT, the WTO Secretariat in Geneva is
established as the adjudicating body of disputes between member
countries.  The decisions of the WTO in trade disputes are
considered binding among member states; such a forum is a sound
model for the enforcement of an international CO2 permit regime.

C.   GEOGRAPHIC Clusters

9.   Geographic Locations
     a.   Geographic Domain : Global [GLOBAL].
     b.   Geographic Site   : Global [GLOBAL].
     c.   Geographic Impact : Global [GLOBAL].

10.  Sub-National Factors:  NO.

11.  Type of Habitat:  Global [GLOBAL].

D.   TRADE Clusters

12.  Type of Measure:  Quota [QUOTA], Regulatory Standard
                         [REGSTD], Administration [ADMIN].
     As stated above, a CO2 tradeable permits regime would
initially involve multilateral negotiations by participating
countries to set an aggregate level of emissions.  Quotas would
then be issued equal to this amount among the nations involved in
the program.  Countries that emit a greater amount of CO2 than
their allowance of permits would then have to trade/buy permits
from countries that have permits to spare.  The CO2 tradeable
permits scheme would serve as a global regulatory standard and
its administration is still being debated.

13.  Direct vs. Indirect Impacts:  DIRect and INDirect
     A CO2 tradeable permit scheme would have a direct impact on
the trade of fossil fuels because it would limit the use of this
source of energy to the world economy.  The indirect trade impact
would affect a wide variety of industries and land use policies
because of the global dependence on fossil fuels.  Such a regime
would alter trade flows and the course of global development.

14.  Relation of Measure to Environmental Impact
     a.  Directly Related     :  YES (Fossil Fuels)
     A CO2 tradeable permit treaty would relate to the use of
fossil fuels in the global economy.  An agreement on abatement of
CO2 is a central component because it is the biggest single
contributor to global warming (Grubb, 1994, p. 287).  Such a
treaty would limit the overall emissions of CO2 by requiring
participating countries to cut back on the burning of fossil
fuels as an energy resource.
     b.  Indirectly Related   :  YES (Mining, Durable
                                   Manufacturing, Non-Durable
                                   Manufacturing, and Services)
     The indirect relation of the measure spans across many
industries and products.  For example the effects would relate to
the mining of coal, production of utilities, manufacturing of
automobiles and petroleum products, and services such as
transportation and tourism.  With such a broad based reliance on
fossil fuels as an energy resource no sector of the global
economy would be unaffected.
     c.  Not Related          :  NO
     d.  Process Related      :  YES (Global Warming [GWARM])
     The measure's relation to process involves how
industrialization has produced an externality that threatens the
global environment.  The measure is not directed at the treatment
of CO2 as a product itself but how the process of development has
produced the undesired environmental effect.  Global warming is a
result of human activity and natural ecosystems are threatened by
how humans are relating to the natural environment.

15.  Trade Product Identification:  FOSSIL FUELS

16.  Economic Data  n/a

17.  Impact of Measure on Trade Competitiveness:  
     Cost ($)                 :  HIGH
     Coverage (%)             :  HIGH
     Price Effect (%)         :  HIGH
     Competitive Effect (%)   :  HIGH

18.  Industry Sector:  Mining(M), Durable Manufacturing(D),
                         Non-Dur. Manufacturing(N), Services(S).

19.  Exporter and Importer:  USA and USA
     As noted above a number of countries have made unilateral
declarations and some have passed legislation directed at abating
CO2 emissions.  These measures will be difficult to maintain once
the economic costs and the political problems associated with an
eroding competitive position of domestic industries materializes. 
The table below shows the top emitters and the percentage of
global CO2 emissions that they account for.

Table 3: Top Emitters of CO2.
_________________________________________________________________
EMITTER             SHARE OF GLOBAL CO2 EMISSIONS
United States            24%
Former USSR              13%
European Union           13%
Eastern Europe & China        20%
TOTAL                    70%
_________________________________________________________________
Source: Grubb, 1994, p. 288.

E.   ENVIRONMENT Clusters

20.  Environmental Problem Type:  Global Warming [GWARM]

21.  Name, Type, and Diversity of Species 
          Name:  n/a
          Type:  n/a
          Diversity:  n/a

22.  Impact and Effect:  HIGH and Structural [STRCT]
     CO2 accounts for over half the addition of greenhouse gases
in the atmosphere and is projected to account for at least 70% of
radiative change over the next century (Grubb, 1994, p. 285). 
Such an atmospheric change would affect natural ecosystems on
land and in water, and would disrupt human societies.  Global
warming due to excessive CO2 and other greenhouse gases in the
atmosphere would have a structural effect on the environment. 
Actions taken to abate CO2 emissions would require structural
changes to both human societies and natural ecosystems.

23.  Urgency and Lifetime:  5 years and UNKNOWN
     The present proposals for a CO2 tradeable permit regime have
as their goal the stabilization of global carbon emissions at
1990 levels by the year 2000, i.e. five years from now.  There
are substantial scientific uncertainties about the rate and the
eventual consequence of global warming.  There is consensus,
however, that the world has warmed over the last 100 years; and
that if trends in emissions continue as projected, then the
global average surface temperature is likely to rise by several
degrees centigrade over the next century (Grubb, 1994, p. 284). 
Such radiative change in the Earth's atmosphere would be
irregular and there would be regional variations in the impact.

24.  Substitutes:  [LIKE], [RECYC], [SYNTH], [BIODG], [CONSV].
     Alternatives to fossil fuels are available but not yet
widely developed or in use.  Hydro, wind, and solar energy use is
in practice to varying degrees but not yet fully implemented as
the burning of coal or oil products.  Recycling, the use of
synthetic and biodegradeable products, and conservation have
contributed to reducing CO2 emissions, but these measures need to
be further developed. 

F.   OTHER Factors

25.  Culture:  YES
     Global warming can be considered as a by-product of
industrialization and as such is intricately linked to all the
cultures of the world.  Within the last few hundred years
development has taken on a pace that is unrivaled in human
history and continues to speed up with modern technological
advances.  In the developed Western economies people are used to
the living standards achieved via industrialization.  In the
developing world people are striving to attain the living
standards that are enjoyed by the industrialized nations.  When a
global culture of consumption informs the productive endeavors of
the world economy it is difficult to redirect these trends in
human activities.  Industrialization has taken place with a heavy
reliance on fossil fuels and amending this reliance will prove
costly to the global economy.
     The US, as the largest emitter of CO2, provides a salient
example of the relationship between culture and global warming. 
One of the primary sources of CO2 emissions is the automobile,
which is the principle means of transportation in the US.  As the
world's largest economy and a repository of vast technological
capabilities the US has not yet taken steps to provide a feasible
alternative form of mass transportation to the American
population.  There is widespread resistance to changes in the
American way of life concerning the car.  The car-culture in the
US is so ingrained in the people's psyche that any intrusion to
this norm is profoundly offending to the average American.  The
reaction to the Clinton Administration's proposed BTU tax is an
example of this cultural resistance to change.  The proposed tax
was criticized in terms of how burdensome it would be to the
rural population that is dependent on the automobile.
     Elsewhere in the world culture has also played an important
factor in the addition of CO2 into the atmpsphere.  In the former
Societ Union and Eastern Europe the push for development within
the communist economic model left a legacy of pollution that has
greatly contributed to global warming.  These command economies
subjugated environmental considerations to that of economic
development.  In the developing world nascent economies are
driven by production methods that greatly rely on fossil fuels. 
This path towards progress is modeled on the industrialized
nations' blueprint for development which also neglected the
environmental impact of greenhouse gases.

26.  Trans-Border:  YES
     The regulation of the Earth's atmosphere is a transboundary
issue.  Global warming is a problem of the global commons in
which the actions of any one nation affects the rest of the
world.  A CO2 tradeable permit regime would economically benefit
some countries while others were harmed.  Pollution rights among
nations, as opposed to personal property rights, are hard to
define and are not easily defended when they are asserted (Shaw,
1990, p. 172).  In any commons type problem the enforcement of a
workable agreement would be difficult.  Such a solution would
require that the costs of control are borne locally while the
benefits of control are accrued globally.  It is a situation in
which the temptation to free-ride is strong.

27.  Rights:  YES
     As noted above the non-OECD countries have argued that an
abatement regime would impede their development.  They view the
present crisis as a result of the industrialization of the
developed countries.  Since the bulk of greenhouse gases in the
atmosphere has historically come from the OECD countries and the
former USSR, they argue that it should be these countries that
should have to pay for the abatement of future CO2 emissions. 
The logic is that since the world's rich have been the chief
emitters of CO2 into the atmosphere, "there are strong equity
(and some efficiency) grounds for allocating entitlements
initially to the world's poor, so that the necessary purchase of
entitlements by the world's polluters would generate a financial
flow from rich to poor, hopefully providing resources to
encourage development of the poor countries" (Bertram et. al.,
1989, p. 14).

28.  Relevant Literature

     Baumol, William J. and Wallace E. Oates.  The Theory of
Environmental Policy 2nd edition.  Cambridge University Press,
New York, N.Y., 1988.

     Bertram, I.G., R.J. Stephens and C.C. Wallace.  "The
Relevance of Economic Instruments for Tackling the Greenhouse
Effect," in Report to the New Zealand Ministry of the
Environment, 1989.

     Bertram, Geoffrey.  "Tradeable Emission Permits and the
Control of Greenhouse Gases," in Journal of Development Studies,
v28n3, Apr. 1992, pp. 423-446.


     Block, Walter, ed.  Economics and the Environment: A
Reconciliation.  The Frasure Institute, Vancouver, B.C., 1990.

     Costanza, Robert, ed.  Ecological Economics: The Science and
Management of Sustainability.  Columbia University Press, New
York, N.Y., 1991.

     Epstein, Joshua M. and Raj Gupta.  Controlling the
Greenhouse Affect: Fice Global Regimes Compared.  The Brookings
Institution, Washington, D.C., 1990.

     Grubb, M.  The Greenhouse Effect: Negotiating Targets. 
Royal Institute of International Affairs, London, 1989.

     Larsen, Bjorn and Anwar Shah.  "Global Tradeable Carbon
Permits, Participation Incentives, and Transfers," in Oxford
Economic Papers, v46 (Suppl.), Oct. 1994, pp. 841-856.

     Miller, Alan.  "Climate--Economic Models and Policy on
Global Warming," in Environment, v33n6, Jul./Aug. 1991, pp. 3-5+.

     Organisation for Economic Co-operation and Development. 
Convention on Climate Change: Economic Aspects of Negotiations. 
OECD, Paris, 1991.

     Organisation for Economic Co-operation and Development. 
Climate Change: Designing a Tradeable Permit System.  OECD,
Paris, 1992.

     Sterner, Thomas, ed.  Economic Policies for Sustainable
Development.  Kluwer Academic Publishers, The Netherlands, 1994.

     United Nations Conference on Trade and Development. 
Tradeable Entitlements for CO2 Abatement.  UNCTAD, Geneva, 1992.


                           References

     Epstein, Joshua M. and Raj Gupta.  Controlling the
Greenhouse Effect: Five Global Regimes Compared.  The Brookings
Institution, Washington, D.C., 1990.

     Grubb, Michael.  "Global Policies for Global Problems: the
Case of Climate Change," in Economic Policies for Sustainable
Development, edited by Thomas Sterner, Kluwer Academic
Publishers, The Netherlands, 1994, pp. 283-308.

     Larsen, Bjorn and Anwar Shah.  "Global Tradeable Carbon
Permits, Participation Incentives, and Transfers," in Oxgord
Economic Papers, v46 (Suppl.), Oct. 1994, pp. 841-856.


     Shaw, Jane S. and Richard Stroup.  "Global Warming and Ozone
Depletion," in Economics and the Environment: A Reconciliation,
edited by Walter Block, The Frasure Institute, Vancouver, B.C.
1990.

     Tietenberg, Tom.  "Market-Based Mechanisms for Controlling
Pollution: Lessons from the U.S.," in Economic Policies for
Sustainable Development, edited by Thomas Sterner, Kluwer
Academic Publishers, The Netherlands, 1994.