International emissions trading under the Kyoto Protocol:Credit trading

The Kyoto Protocol allows emissions trading between countries. The Protocol does however not specify how such trade is to take place. So far two options have been discussed in the literature: government trading and permit trading. This paper discusses a third option: credit trading. Credit trading is based on abatement projects, but differs from joint implementation in that it does not require direct foreign investment. Furthermore, credit trading can be implemented both domestically and internationally. The main advantages of credit trading are that it excludes trading in hot air, while it still makes trade between private entities possible. However, the environmental effectiveness is doubtful, especially when it is based on relative targets. The paper shows that several interest groups prefer credit trading based on relative targets to permit trading. Also governments may have reasons to prefer credit trading to permit trading. Hence, the political acceptability of credit trading is larger than that of permit trading, making it more likely that credit trading will be allowed than permit trading