The experience with emissions trading in the United States over the past twenty-five years provides the material for drawing five lessons in this chapter for the use of this market-based instrument in controlling greenhouse gas (GHG) emissions. The first two lessons concern how well emissions trading has worked as a regulatory instrument and what makes it work. The other three lessons concern features that are important for GHG emissions trading, namely, temporal flexibility, voluntary participation, and the allocation of allowances.

Lesson 1: Emissions trading works

The main lesson from the US experience with emissions trading is that it works. This conclusion stands in clear contrast to the interim verdict drawn from the research associated with Robert Hahn in the mid and late 1980s (Hahn, 1989, Hahn and Hester, 1989a, 1989b) that emissions trading, although theoretically attractive, didn't seem to work in practice.

Hahn coined a wonderful metaphor to explain the disparity between theory and practice as observed in the early attempts by the EPA to introduce flexibility into the implementation of the Clean Air Act: the patient wasn't following the doctor's prescription. This assessment was not only blunt, but also hopeful in predicting improvement if the patient would only take the medicine (Hahn, 1989). The prediction would be substantiated in the decade of the 1990s and in particular by the “grand policy experiment” (Stavins, 1998) with SO2 emissions trading in the Acid Rain Program.