Risks, Lessons Learned, and Secondary Markets for Greenhouse Gas Reductions

Emissions trading could significantly reduce the costs of limits on greenhouse gas emissions. Complementary domestic policies to reduce fragmentation in evolving secondary markets, establish clear baselines and procedures, and strengthen host-country institutions could further reduce the risks and costs of emission limits.Collectively or individually, countries are likely to implement policies designed to limit greenhouse gas emissions. Experience from tradable quota schemes suggests that emissions trading could significantly reduce the costs of emission limits.The Kyoto Protocol provides the framework for a common trading mechanism for all countries - including countries that would not face immediate emission limits. Significantly, the Protocol places the responsibility for meeting emission limits with national governments.How policymakers choose to implement emission limits will significantly shape the incentives that drive evolving secondary markets for greenhouse-gas-based instruments. Potential market participants who were surveyed rate policy - related risk as higher than business-related risks. Domestic policies designed to reduce fragmentation in secondary markets, establish clear baselines and procedures, and strengthen host-country institutions can all help reduce the risks and costs of emission limits.This paper - a product of the Development Research Group - is part of a larger effort in the group to support more cost-effective environmental regulations. Donald Larson may be contacted at dlarson@worldbank.org