E C O N O M I C R E P O R T O F T H E P R E S I D E N T

However, the country could cut energy subsidies and sell unneeded emissionsallowances through the international emissions trading mechanism.An international emissions market based on trading, JI, and CDM couldallow substantial gains from trade in meeting emissions targets because the costof controlling greenhouse gases differs widely from country to country. Countriesthat have relatively inexpensive ways of controlling greenhouse gases haveincentives to reduce emissions by more than their targets require, because theycan then sell tradable allowances that they will not need. By the same token,countries facing more expensive emissions abatement measures have incentivesto buy less costly allowances from others. Modeling analyses of the Kyoto Protocolhave found that, for the United States, moving from a no-internationaltradingscenario to a scenario of efficient trading among industrial countrieswould cut the price of a tradable carbon dioxide permit (a measure of marginalcompliance cost) by half.Expanding the Scope of Trading to More CountriesModeling analyses also illustrate the significant potential for additionalcost savings by expanding emissions trading to developing countries. Amongthe world’s large economies, the cost to a country to abate a given percentageof its greenhouse gases may vary by more than a factor of 20. If developingcountries adopt binding emissions targets, they can participate in internationalemissions trading and may gain substantial revenue from selling permitsin the international emissions market (Box 7-6). In an efficient globalmarket, low-cost opportunities to reduce greenhouse gases in developingcountries would attract foreign direct investment in energy and industrialabatement technologies and for carbon dioxide sequestration activities (suchas planting and managing stands of trees to absorb carbon dioxide). Developingcountries could generate billions of dollars in revenue annuallythrough the sale of emissions allowances to countries with higher abatementcosts. Effectively, the Kyoto Protocol provides the potential for low-cost abatingdeveloping countries to create an export industry whose product is emissionsabatement. While providing economic and environmental benefits todeveloping countries, an efficient global trading system could reduce thetradable permit price by up to about 90 percent in the United States.Expanding the Scope of Trading to MoreGreenhouse GasesExpanding the scope of trading could capture even more benefits. Recentanalyses have found that allowing for trading across greenhouse gases can lowerthe cost of meeting emissions targets. Greenhouse gases could be traded on thebasis of global warming potentials, which provide a measure of the effect of each268 | Economic Report of the President