Greenhouse gases can contribute to global warming regardless of their country of origin. To reduce the impacts, it doesn't matter which region of the world cuts back on emissions, as long as the overall amount across the globe falls.

That is the idea behind greenhouse gas emissions trading, which places a cap on total emissions, allocates credits to individual emitters and then allows them to buy or sell credits in a market to meet their targets. These systems are set up within a cap-and-trade program enacted by legislation of the state, country or region.

All emissions trading markets operate in a similar manner: The regulating body sets a cap on emissions and divides this into allocations for each smaller division, a state for example. The state then determines the levels each individual polluting company can emit. Over time, the emissions allocations will decrease and emitters will need to adjust their strategies under the new levels.

Trading programs are meant to provide a cost-effective and efficient way to lower emissions by putting a price tag on each ton of greenhouse gas released into the atmosphere. The price of an emission unit is determined by supply and demand as with any other market commodity. Under the system, companies must have enough credits to cover their emissions at the end of a determined period.

Using a market-based system allows reductions to be made where they are cheapest; Companies that find it difficult or expensive to reach their targets can buy emissions credits from companies that have more easily or cheaply reduced their emissions below their assigned amount. It also encourages companies to develop new technologies to avoid more expensive measures that may be required in the future.

Compared to other emission reduction strategies, such as taxes or a command-and-control approach that makes surpassing regulations punishable by law, some experts say trading is the most economical way because it gives companies the flexibility to choose how to reach their target.

"Trading ... sets a price for carbon, and companies are really good at minimizing their input costs. There is incentive for companies to help the environment," said Janet Peace, a senior research fellow at the Pew Center for Global Climate Change.

Some programs allow companies to sponsor emissions reduction projects outside of their sector to receive offset allowances that count toward reaching their target. Offsets give companies more opportunities to find cost reductions while still decreasing the amount of overall greenhouse gases emissions.

The ideal trading program would be a large one, according to Peace, because it would create more opportunities to find emissions at a lower cost and make it easier to meet reduction requirements.

Cap-and-trade programs work best in sectors with a relatively concentrated number of companies, such as power plants, heavy industry and the pharmaceutical industry. Other sectors, such as agriculture, transportation and forestry, emit greenhouse gases but enforcing a trading system would be difficult because of the obstacles to setting up an emissions registry, said John Pershing, the director of Climate and Energy Program at World Resources Institute, an environmental research group based in Washington, D.C.

Where trading programs exist
Currently an international trading system for greenhouse gas emissions does not exist, nor does a nationwide program in the United States. The most developed system in the world involves the European Union and was modeled after the United States' cap-and-trade system under the Clean Air Act to reduce nitrous oxide and sulfur dioxide emissions responsible for reduce acid rain.

The European Union's Emissions Trading Scheme, established in 2003, is the first example of a regional market for carbon dioxide emissions trading. While inspired to help member states achieve their targets set in the Kyoto Protocol, the ETS is part of EU law and would have gone into effect even if Kyoto had not been ratified, said Danny Ellerman, the executive director of the Center for Energy and Environmental Policy Research at the Massachusetts Institute of Technology.

The Kyoto Protocol allows certain participating countries to buy and sell some of their allowances to meet their emissions targets. It also permits different domestic or regional trading schemes to link to one another.

The ETS is still in an experimental phase and the environmental impact are still unclear but observers say the program has had a positive influence. "Companies are incorporating a positive price for carbon into their production and pricing decisions whereas they were not before," said Ellerman.

Potential in the United States
In the United States, there several different legislative proposals for nationwide greenhouse gas cap-and-trade programs with varying approaches. Environmentalists agree that any policy on climate change should include a cap-and-trade program that establishes an emissions market.

Pershing said there are two basic approaches to establishing a nationwide program in the United States: creating a federal program that would use a common system in each state or allowing states to make their own programs and trade credits among themselves as countries trade international currencies.

The number of states interested in creating a cap-and-trade program is growing and some have already taken steps to set up statewide or regional programs.

In the Northeast, the Regional Greenhouse Gas Initiative would establish the first collective effort in America to adopt mandatory controls for carbon dioxide emissions. The governors of Connecticut, Delaware, Maine, New Hampshire, New Jersey, New York and Vermont signed a memorandum to create a cap-and-trade program covering all power plants that includes a trading program.

In April 2006, Maryland passed a law requiring the state's participation as part of its Healthy Air Act. Washington, D.C., Massachusetts, Pennsylvania, Rhode Island, the Eastern Canadian Provinces and New Brunswick are observers in the process and may join later.

The RGGI cap will be set at current emissions levels when the program begins in 2009 and reduce emissions 10 percent by 2019. It allows companies to use offset allowances.

California, Oregon and Washington also are developing trading systems as part of their climate change policy.

Critics of cap-and-trade
Not all agree that the current cap-and-trade proposals are the best way to reduce greenhouse gas emissions. Ellerman divides critics of emissions trading into two groups: those that oppose putting a price on carbon and those that prefer taxes or a command-and-control approach over emissions trading.

"In the U.S. at least, I think it is fair to say that companies would prefer emissions trading to any other alternative if they are going to be required to take action to address some environmental problem," wrote Ellerman in an e-mail.

The complexity of any trading program makes it difficult for people understand and also difficult for them to follow. It requires setting up a detailed registry of emissions and a complicated system of accounting.

Because trading works in some sectors and not others, there are complaints about the fairness of regulating certain sectors such as power plants when greenhouse emissions come from the entire economy. Environmentalists and politicians are pushing for trading programs as part of a broad spectrum of policies tailored to each sector.

Another objection is that trading allows emitters to pollute instead of forcing them to cut back on emissions entirely. The counter argument is that companies are currently polluting for free. "Politically, you can't jump in with major restraints and put people out of business. There's a balance between a growing economy and reducing emissions," said Peace. "Cap-and-trade puts a price on it but some people have difficulty pricing the environment."

-- By Anna Shoup, Online NewsHour