The liability rules under international GHG emissions trading

Article 17 of the Kyoto Protocol authorizes emissions trading, but the rules governing emissions trading have been deferred to subsequent conferences. In designing and implementing an international greenhouse gas (GHG) emissions trading scheme, assigning liability rules has been considered to be one of the most challenging issues. In general, a seller-beware liability works well in a strong enforcement environment. In the Kyoto Protocol, however, it may not always work. By contrast, a buyer-beware liability could be an effective deterrent to non-compliance, but the costs of imposing it are expected to be very high. To strike a middle ground, we suggest a combination of preventive measures with strong but feasible end-of-period punishments to ensure compliance with the Kyoto emissions commitments. Such measures aim to maximize efficiency gains from emissions trading and at the same time, to minimize over-selling risks.