The possibility of international trade in credits for greenhouse gas (GHG) emission reductions is a key “flexibility mechanism” built into the December 1997 Kyoto Protocol for international GHG reduction. The Protocol allows ntities in Annex I countries (the industrialized countries agreeing to cap their total emissions) to trade emission reductions. Through the “Clean Development Mechanism” (CDM), investors in Annex I countries also can secure GHG reduction credits for emission-reducing activities in non-Annex I developing countries that have not accepted national emission caps. For these forms of international emissions trading to be seen as credible forms of real emissions reductions, legal responsibility, or liability, must be assigned for the failure of promised emission reductions embodied in the credits to materialize. While a well-functioning compliance system is crucial for the integrity of trading, however, excessive restrictions on trading to enforce responsibility could stifle emission credit markets and raise international compliance costs to unacceptable levels.
Kerr, Suzi. 2001. "Enforcing Compliance: The Allocation of Liability in International GHG Emissions Trading and the Clean Development Mechanism" in Climate Change Economics and Policy: An RFF Anthology, Michael A. Toman Ed. Washington DC: Resources for the Future.