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

disruptive in some cases. Finally, the growing U.S. trade deficit raises thechallenge of ensuring not only that the United States remains an attractivelocation for investment, but also that Americans are saving enough for thefuture.Maintaining the Environment EfficientlyChapter 7 notes that although economic growth and structural andtechnological change have altered the U.S. economy substantially for thebetter over the past century, they have brought in their wake an array ofenvironmental problems, including air, water, and soil pollution. However,economic growth has also provided the innovation and the resources toaddress these environmental problems.The chapter describes how traditional regulatory approaches designed toaddress environmental problems have delivered substantial benefits but havecarried significant economic costs. It then discusses how experiences withmarket-based approaches to pollution abatement, such as permit trading andemissions charges, have shown ways to achieve environmental goals at lowercost while providing the proper incentives for innovation. It suggests thatapplying these lessons about the design of environmental markets to futureenvironmental problems is critical if environmental goals are to be achievedmost efficiently.The most significant environmental problem of the 21st century is probablyglobal climate change. Chapter 7 argues that this problem is bestaddressed through market-based approaches. The challenge is to designpolicies appropriate to the problem. Emissions trading could serve as apowerful tool to reduce greenhouse gases, because these come from a verylarge number of sources with a wide range of abatement costs and have thesame environmental effect regardless of the source location.In negotiations of the Kyoto Protocol to the Framework Convention onClimate Change, the Administration has advocated internationalemissions trading and project-oriented mechanisms that effectively allowfor flexibility across sources and countries in meeting climate goals. Abroad international trading system can significantly lower the costs ofachieving emissions targets set in the Kyoto Protocol while also deliveringsubstantial revenue to low-cost-abating countries, which would be sellersin an international emissions market. Future international climate negotiationscan resolve many of the implementation issues regarding thesemarket-based approaches. Appropriate design of these approaches canensure that the first steps taken to address climate change will deliverenvironmental benefits at the lowest possible cost.46 | Economic Report of the President