Trading sulphur emissions in europe: "Guided bilateral trade'

In this paper a system of 'guided permit trading' is developed for SO2 emissions reduction which considers permit trading as a bilateral and sequential process. This implies that in order to meet the deposition targets at the end of the trading process, not every single trade transaction has to meet the deposition targets. To ensure that the target is ultimately met, the number of permits traded should be controlled by a trade coordinating institution. A simulation of the system of guided bilateral trading of SO2 permits among European countries on the basis of the Second SO2 Protocol indicates that some non-profitable trade transactions take place. This prevents the cost effective emission allocation from being fully achieved. However, the calculations show that guided bilateral permit trading may generate substantial cost savings while contributing to environmental protection.