Improving Cost-effectiveness and Facilitating Participation of Developing Countries in International Emissions Trading

This paper discusses ways in which the next climate agreement – a renegotiated Kyoto Protocol or a second-period agreement – can be made more cost-effective. The discussion focuses on the design of international emissions trading to facilitate early participation by developing countries. Four aspects are highlighted: the design of compensation rules, the need to regulate the use of the CDM, the effect of allowing borrowing and the implications of a Commitment Period Reserve.