A Brief Guide to Emissions Trading

Under the Kyoto Protocol, many developed nations have agreed to roll back their emissions of carbon dioxide and other gases that contribute to global warming. One way they hope to achieve the cuts is through "emissions trading."

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Emissions trading is based on policies first developed in the United States to control the sulfur emissions from coal-burning power plants that cause acid rain. The government first established a cap on total sulfur emissions that declined over time. It then allowed power producers to decide how to best stay under the cap. They could either switch to fuels or equipment that reduced their sulfur emissions, or they could buy permits to pollute — from companies that were already under their caps. Over time, as the cap is lowered, the permits to pollute become more expensive — driving power producers to switch to less polluting power sources.

The Kyoto Protocol takes the "cap-and-trade" approach to the international arena. Under its rules, each country or region is allowed to assign a cap on emissions of carbon dioxide, which is typically created by the burning of fossil fuels such as coal. Countries or companies that are over their assigned caps can buy permits from countries or companies that are under their caps.

Russia, for instance, is expected to have extra credits available for sale for at least the next five years. Europe has chosen this method to reach the reduction targets it agreed to under the Kyoto Protocol. More than 12,000 large carbon dioxide emitters have been issued credits. But those emitters represent only 40 percent of overall emissions, so Europe will also need to find ways to promote clean automobiles and to encourage people to save energy at home.

The protocol also provides another way for countries to exceed their carbon caps. They can fund projects in developing nations that either capture and store carbon, or promote the development of less polluting energy sources. For instance, a country can earn more credits by reducing emissions at power plants in the developing world.

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