Table of Contents

Market Mechanisms & Global Climate Change

Foreword     ii

Executive Summary     1

I. Market Mechanisms for Environmental Protection     3

A. General Theory of Market Mechanisms     3
B. Five Essential Elements for Environmental and Economic Intergrity     5
C. The Importance of Flexibility in Time and Place     6
D. Common Criticisms of Market Mechanisms     8

II. Historical Experience with Market Mechanisms in Europe and the United States     10

A. Limitations on Sulfur Dioxide Emissions     10
B. Implementing the Montreal Protocol on the Ozone Layer     13
C. A Comparative Example: New Zealand's Fisheries Law 1996     14
D. Lessons Learned in Program Design     14

III. The Market Mechanisms of the Kyoto Protocol     16

A. The Emissions Trading Framework in the Kyoto Protocol     16
B. The Two Types of Emissions Trading     18

IV. Special Focus Topics     22

A. The Kyoto Protocol and the Five Essential Elements     22
        1. Defining What is Traded     22
        2. Assigned Amounts and Actual Emissions Performance: Ensuring Accountability     23
B. The Clean Development Mechanism: Addressing Baselines, Leakage, and
            Additionality     24
C. A Special Case of "When" Flexibility: Credit for Early Action     26

V. Unresolved Issues: Proposals to Restrict the Use of Market Mechanisms     28

A. Proposal for Quantitative Restrictions     28
B. Proposals for Qualitative Restrictions     28

VI. Conclusion     31

Appendix I: Sources and Materials     32

End Notes     33