In October of 2001, the European Union (EU) proposed the development of a European-wide greenhouse gas (GHG) emissions trading program. The European proposal represents the most significant GHG program planned to date—and a potentially groundbreaking model for the rest of the world.

Emissions trading provides a cost-effective means of reducing GHG emissions and a dramatic improvement over traditional “command-and-control” regulations. Experience with existing cap-and-trade programs indicates that the approach can reduce the cost of meeting emission reduction targets by as much as 50 percent. There are, however, a number of elements to be worked out to turn a proposal into a workable program. One of the most important elements is the initial allocation of allowances, which can affect the effectiveness and perceived fairness of the program.

This article is republished with permission from the Infrastructure Journal, July/August 2002, http://www.infrastructurejournal.com.