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If climate change now seems inevitable, its worst effects can be avoided if the world acts to reduce emissions, and, in due course, to stabilize the levels of carbon dioxide in the atmosphere. Economic instruments have been internationally recognized as the best way to respond to climate change. Under the Kyoto Protocol, the European Community and its member states can agree to meet their commitments jointly. The British Climate Change Program sets out the principles and administrative strategies for tackling climate change. In terms of costs and benefits, the British Trading Permit Climate Change Scheme is one of the best performing schemes in Europe and probably in the world. This paper explains the genesis of the British scheme and how it works. The legal mechanism of this scheme could be a guide and an example for an efficient European program in response to climate change. The British scheme seeks to maintain competitiveness of the industries concerned. However, although in economic terms it seems to be an efficient combination of incentives and subsidies combined with the allocative virtues of a market mechanism, it carries considerable transaction costs, in particular in terms of control, and its legal rules are frequently indeterminate. Yet, this need not be a disadvantage as this allows the system to evolve and adapt itself to changes in circumstances and in the legal environment.