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cap and trade, carbon markets, emissions trading, Gresham's Law, Kyoto Protocol


Over the last several years, so-called carbon markets have
emerged around the world to facilitate trading in greenhouse gas
credits. This Article takes a close look at an unexpected and
unprecedented development in some of these markets—premium
“green” currencies have emerged and, in some cases, displaced
standard compliance currencies. Past experiences with other
environmental compliance markets, such as the sulfur dioxide and
wetlands mitigation markets, suggest the exact opposite should be
occurring. Indeed, buyers in such markets should only be interested in
buying compliance, not in the underlying environmental integrity of the
compliance unit. In some of the compliance carbon markets, however,
higher quality green credits have emerged in recent years as important
currencies for a number of buyers, representing a dynamic that we
refer to as “Gresham’s Law in reverse”—more stringent currencies
arising alongside and even displacing inferior currencies. This Article
provides the first recognition and analysis of green differentiation in
carbon markets. We explore a range of explanations for this curious
development. We then identify potential lessons for the design and
evolution of future carbon markets and, more generally, environmental
compliance markets.

Library of Congress Subject Headings

Gresham's law, Carbon offsetting, Emissions trading, United Nations Framework Convention on Climate Change (1992 May 9). Protocols etc. (1997 December 11)