This paper discusses the problems of implementing a cap-and-trade system for controlling [SO.sub.2] emissions in China. It describes the evolution of current air emissions policy for [SO.sub.2] emissions and focuses on two critical aspects for establishing a tradable permits system in China: the transition from (nontradable) facility-specific permits to tradable (emission) permits and the integration of tradable permits with the pre-existing pollution levy system. A major theme throughout the paper is that the requirements for establishing an effective tradable permits system do not differ greatly from those for an equally effective tax or command-and-control regime. Although each instrument has distinctive features, the differences among them are mainly ones of form. All require that the same fundamental problems be solved: How to allocate the cost burden of reducing emissions, what specific requirements to place on emitting sources, and how to ensure compliance.

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