Has COP-VI increased likelihood of ratification? International trading will get a boost if the rules adopted at COP-VI enhance the likelihood of ratification of the Kyoto Protocol by the U.S. Senate. Obviously, the outcome of the Presidential election may be decisive, but the strength of the rules on inter-national emissions trading could dramatically affect the costs of compliance by United States industries. Minimizing those costs and bringing China, India, and other non-Annex I countries into the fold for future commitments may be prerequisites to Senate ratification. 

Are private sector companies allowed to trade freely GHG interests? The Hague Agreements should explicitly assure priv ate sector companies, regardless of their national domicile, of the right to hold and to transfer GHG interests, be they parts of a nation’s assigned amount units, emission reduction units under joint implementation (JI), or certified emission reductions under the Clean Development Mechanism (CDM). The right to purchase and sell GHG interests should be recognized by international law and companies should not be required to first obtain authorization to trade from either the nation of legal domicile or the nation of the source of emissions reductions. Private sector trading should also not be made conditional upon a nation’s ratification of the Protocol or its adoption of domestic implementation measures. While it is likely that the Hague Agreements will include some type of liability rules that restrict trading by nations that are not in some stage of compliance, a key for private sector participation is that companies be free to participate in the market immediately, subject, of course, to the risk that their nation may, in the future, cease to be in compliance with its obligations.

Are private sector companies allowed to trade strictly for investment purposes? The key to development of a robust market for GHG rights is facilitation of trading for investment purposes, rather than for compliance purposes. Companies should be allowed to hold and trade freely GHG rights without regard to whether they or their nation of origin need GHG rights for compliance purposes. CDM credits must not be restricted to companies or nations that meet specific criteria. Once certified, CDM credits should be transferable to any entity, which may trade the credits for speculative, investment purposes, without obtaining any nation’s approval for such trading. If the Hague Agreements allow host nations to restrict the trading of CDM credits, international emissions trading will be less robust.

Are GHG rights recordable and enforceable? The Hague Agreements will facilitate international emissions trading if a registry is established in advance of the Kyoto Protocol coming into force, so that companies can obtain legal recognition of credits purchased and forward contracts. The Hague Agreements will also facilitate trading if companies can enforce their trading contracts under international law and have recourse to fair tribunals, such as international arbitration panels. How much sovereign and regulatory risk is assumed by traders? To the extent the Hague Agreements reduce the scope of sovereign and regulatory risks that traders must assume in their contracts, trading will be facilitated.

How low are transaction costs? International trading will flourish if transaction costs are kept low and are reasonably predictable. Complex institutional requirements for verification and certification of GHG rights and cascading fees and taxes will dampen private sector enthusiasm to assume the inherent risks in trading GHG rights.

Can trading begin now? Finally, markets will develop more quickly if the Hague Agreements recognize credits created as of January 1, 2000 and allow enforcement of current contracts. 

There are other significant issues, such as the treatment of land use changes and forestry-based credits, but international emissions trading could get a jump start even if trading were initially limited to fossil fuel burning projects.