of Sweden is steeper (higher slope) than that of Germany, and RReq is the total amount of emissions that need to be reduced by a country. On the left side of the graph is the MAC curve for Germany. RReq is the amount of required reductions for Germany, but at RReq the MACG curve has not intersected the market emissions permit price of CO2 (market permit price = P = λ). Thus, given the market price of CO2 allowances, Germany has potential to profit if it abates more emissions than required. On the right side is the MAC curve for Sweden. RReq is the amount of required reductions for Sweden, but the MACS curve already intersects the market price of CO2 permits before RReq has been reached. Thus, given the market price of CO2 permits, Sweden has potential to make a cost saving if it abates fewer emissions than required internally, and instead abates them elsewhere. In this example, Sweden would abate emissions until its MACS intersects with P (at R*), but this would only reduce a fraction of Sweden's total required abatement. After that it could buy emissions credits from Germany for the price P (per unit). The internal cost of Sweden's own abatement, combined with the permits it buys in the market from Germany, adds up to the total required reductions (RReq) for Sweden. Thus Sweden can make a saving from buying permits in the market (Δ d-e-f). This represents the "Gains from Trade", the amount of additional expense that Sweden would otherwise have to spend if it abated all of its required emissions by itself without trading. Germany made a profit on its additional emissions abatement, above what was required: it met the regulations by abating all of the emissions that was required of it (RReq). Additionally, Germany sold its surplus permits to Sweden, and was paid P for every unit it abated, while spending less than P. Its total revenue is the area of the graph (RReq 1 2 R*), its total abatement cost is area (RReq 3 2 R*), and so its net benefit from selling emission permits is the area (Δ 1-2-3) i.e. Gains from Trade The two R* (on both graphs) represent the efficient allocations that arise from trading. Germany: sold (R* - RReq) emission permits to Sweden at a unit price P. Sweden bought emission permits from Germany at a unit price