Greenhouse gases harm the environment equally regardless of where they originate, so to slow climate change, it doesn't matter which region of the world cuts back on emissions as long as the global amount 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-based system to meet their targets. These systems are set up within a cap-and-trade programs enacted by state, country or regional legislation.

All emissions-trading markets operate in a similar manner: the regulating body sets a cap on emissions and allocates a limit 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.

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. At the end of a set period, companies must have enough credits to cover their emissions.

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 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 more economical because it gives companies 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. In other sectors that emit greenhouse gasses, such as agriculture, transportation and forestry, 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
The European Union's Emissions Trading Scheme is the most developed system in the world. When it began operating in 2005, it was the first regional market for carbon dioxide emissions trading. The EU ETS was modeled after the United States' cap-and-trade system set up to reduce nitrous oxide and sulfur dioxide emissions that are responsible for acid rain as part of the Clean Air Act.

Now in its second trading period, the ETS has capped emissions at around 6.5 percent below 2005 levels to help member states reach their commitments under the Kyoto Protocol, an international climate change agreement to reduce greenhouse gas emissions. During the first phase, the program over-allocated emissions allowances, which led to minimal environmental impact.

But the program is geared toward long-term goals. The first phase ended in 2008 and set up a functioning structure for an emissions trading market despite difficulties, wrote Denny Ellerman and Paul L. Joskow in a report for the Pew Center on Global Climate Change.

"So far, all indications are that the trial period accomplished its goal," they wrote. "The initial challenge is simply to establish a system that will demonstrate the societal decision that GHG emissions shall have a price and to provide the signal of what constitutes appropriate short-term and long-term measures to take in limiting GHG emissions to the desired amounts. In this, the EU has done more with the ETS, despite all its faults, than any other nation or set of nations."

In 2008, the EU set emissions reduction targets for the third phase that will run from 2013 to 2020 at 21 percent of emissions compared to 2005 emissions.

Potential in the United States
No international trading systems for greenhouse gas emissions exists; nor does a nationwide program in the United States. But President Barack Obama has called for one as part of his energy policy.

In past years, Congress has proposed legislation that includes a cap-and-trade system as part of climate change bills but nothing has been signed into law. In June 2008, a climate change bill that aimed to use a cap-and-trade system to cut greenhouse gas emissions 70 percent by 2050 was abandoned in the Senate.

At the time, the U.S. was facing record-high energy prices and the bill's opponents argued that it would raise them even more. President George Bush also opposed the bill, claiming it would hurt the U.S. economy.

President Barack Obama pledged during his campaign to set up an economy-wide cap-and-trade system with an even more ambitious goal of reducing emissions by 80 percent by 2050.

But while a nationwide system remains in the works, the number of states interested in creating cap-and-trade programs is growing and some have already taken steps to create regional initiatives.

In the Northeast, the Regional Greenhouse Gas Initiative established the first collective effort in America to adopt mandatory controls for carbon dioxide emissions. Ten states -- Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont-- agreed to reduce carbon dioxide emissions from power plants 10 percent by 2018 through a mandatory cap-and-trade system.

On the West Coast, the Western Climate Initiative – a cross-border proposal between seven U.S. states and four Canadian provinces -- designed a cap-and-trade program that would cover 90 percent of the region's emissions from electricity, industry, transportation, and residential and commercial fuel use. The program begins in 2012 with the first phase in a program to cut emissions 15 percent of 2005 levels by 2020.

In the Midwest, the Midwestern Greenhouse Gas Reduction Accord also has plans to set up a market-based system to reduce emissions in Minnesota, Wisconsin, Illinois, Iowa, Michigan, Kansas and the Canadian province of Manitoba.

Critics of cap-and-trade
But even as more climate change proposals include cap-and-trade programs, not all experts agree that they are the best way to reduce greenhouse gas emissions. Denny Ellerman, an economist at MIT, divides critics of emissions trading into two groups: those who 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.

Since trading is easier to implement in some industries, there are complaints about the fairness of regulating sectors such as power plants while 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