I. Introduction

Emissions trading is increasingly recognized as a cost-effective policy instrument to reduce the concentration of greenhouse gases (GHGs) in our atmosphere. The concept, which until recently was treated with suspicion by many countries, has seen in the last 12 months unprecedented proliferation and success.

In October 2003, Directive 2003/87/EC "establishing a scheme for greenhouse gas emission allowance trading within the Community" became law in the European Union (EU). The objective of the newly established EU Emissions Trading Scheme (ETS) is to reduce the emissions of GHGs in an efficient and cost-effective manner. The initially adopted scheme was limited to emissions allowance trading within the EU and did not link the EU ETS to emission reduction credits (ERCs) generated under the Kyoto Protocol. Therefore, such credits, namely emission reduction units (ERUs) and certified emission reductions (CERs), could not be used by operators of covered installations to meet compliance obligations under the EU ETS. To remedy this, the EU has recently adopted a directive to amend the EU ETS to link the scheme to emission credits that comply with the Kyoto Protocol.

The EU trading scheme will encompass not only the 15 previous EU Member States but will also apply to all its newly acceded Members. Denmark and the United Kingdom (U.K.) have traded with emission allowances since July 2000, and March 2002, respectively. Canada, Japan, Norway, and several U.S. states have expressed their intent to establish similar GHG trading systems, to name only a few incentives that have been announced over the last months. Finally, Chile, the only developing country engaging in emissions trading so far, has recently adopted a bill which establishes a trade in pollution permits.