The finding was based on an analysis of current emissions trading schemes (ETSs) in the European Union (EU), as well as cap and trade systems for other types of emissions that are already in place in the US.

“The European experience confirms that cap and trade systems can be constructed, that markets emerge to facilitate trading, that emissions are reduced efficiently, and that the effects on affected industries are less than predicted," said Denny Ellerman, the study’s lead author and senior lecturer in the MIT Sloan School of Management.

The study found that the most controversial aspect of the EU’s programs was how to allocate the permitted emissions levels to different producers. It said that initial allocation of allowances was necessary for gaining political acceptance, and that the trend in the EU was to phase out the free allocation of permits in favour of auctioning them.

The report also looked at mechanisms used to control the costs imposed on power producers as a result of an ETS, analysis alternatives such as banking and borrowing of allowances, renewable portfolio systems, and ‘safety valve’ systems – a system that imposes a fixed price on emissions permits. The study found that the best mechanism depended on the maturity of the ETS.

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The report said that due to a lack of federal ETS policy in the US, many states are moving forward with their own initiatives, from emissions reduction targets to multi-state cap and trade programs.

However the report also said that, as federal legislation is expected in the next few years, it is unclear how a relation between state and federal programs would play itself out.

Australia is still awaiting a decision on its own ETS, with further debate in the Senate for the Federal Government’s Carbon Pollution Reduction Scheme scheduled for May.

You can access a copy of the report here.