Making GHG emissions trading work – Crucial issues in designing national and international emmissions trading systems

Art. 17 of the Kyoto Protocol defines International Emissions Trading exclusively on country level, sub-national entities like industrial installations or households are not included initially. However, there are some arguments for such an expansion, of which the most important ones are a significant increase of the overall efficiency of the trading system as well as an increase of market liquidity. In the first part of this paper, the options for an inclusion of sub-national entities are analysed, concluding that AAUs should not be allocated to participants directly. Instead, there are several options how those entities can be included in International Emissions Trading as defined in the Kyoto-Protocol in an indirect way. The second part of the paper elaborates on the design options of national trading systems. All governments planning to introduce a domestic emissions trading scheme covering entities need to consider several design parameters, e.g. the characteristics of emission targets, participants of the trading scheme, participation mode, covered gases, non-compliance provisions, etc. We analyse and evaluate the options for each of those aspects, having in mind that the design of a trading system must assure its environmental integrity and keep transaction costs low at the same time.