Tradable Pollution Permits

• What is the definition of a pollution permit?

  The government sets a level of pollution that is allowed from a certain industry.

  Permits are set by the government based on this level.
• What are the private costs of CO2 emissions?

  • mining equipment
  • wages for staff
  • health impact on miners
  • transport cost for shipping coal etc to power stations
• What are the external costs of CO2 emissions?

  
  

  • climate change - make some areas inhabitable, more extreme weather, difficulty with crop growing, etc.
  • pollution from power stations can affect the health of those living nearby.
• What are the private benefits of CO2 emissions?

  • warm homes and nutritious cooked food for those buying energy.
  • consistent/predictable energy supply.
• What are the private benefits of CO2 emissions?


  • local multiplier effects
• What does cap and trade involve?

  Involves putting a price on carbon and physically limiting the quantity that can be traded.

  A cap and trade scheme forms the basis of the EU emissions trading scheme.
• How is the price mechanism involved in pollution permits in the carbon industry?

  Uses the market mechanism to change relative prices and the incentives of producers and consumers to reduce their carbon emissions.
• Give some detail on the EU Carbon Emission Trading Scheme?

  The EU Carbon Emission Trading Scheme is cap and trade scheme for carbon dioxide. It operates in 31 countries (the 28 EU countries, Iceland, Liechtenstein and Norway). it covers the 45% of the EU‘s greenhouse gas emissions that come from energy intensive sectors.
• What does a decreasing cap mean?

  A decreasing maximum limit
• How does the EU Carbon Emissions Trading scheme works?

  The scheme sets a decreasing cap (i.e. a maximum limit) for CO2 from energy intensive industries, and then allocated or auctions emissions allowances (permits) which are to be traded on the open market.
• What is the effect of the EU Carbon Emissions Trading Scheme on businesses?

  Businesses must buy enough emissions allowances to cover their CO2 emissions - the higher the price, the greater the incentive to cut pollution. Increasing the scarcity of carbon permits leads to an increase in price. This is one reason why the cap is reduced over time.

  This makes it more expensive for firms to emit carbon which in turn increases the incentive for investment in low carbon technologies.
• What is a reason why the cap is reduced over time?

  Increasing the scarcity of carbon permits leads to an increase in price.
• What does carbon trading provide?

  A quantity adjustment to the volume of CO2 emissions.
• What does diagram look like regarding Carbon Trading and tackling negative externalities?

  DIAGRAM BELOW:

  
• Give details, describing the diagram regarding Carbon Trading and tackling negative externalities?

  • The price of carbon has increased from P to P1(P*).
  • This is because an increase in the price of a permit has tried to internalise a negative externality.
  • In other words, an increase in the price of a carbon permit we‘re internalising that externality and making the polluter pay.
  • The price of the permit reflects the marginal social cost of production.
  • Also, quantity of carbon has reduced from Q to Q1(Q*).
  • This should result in a reduction of negative externalities .
• Evaluating Tradable Permits - What are the problems with the ‘social optimum‘?

  The success (or otherwise) of permits in achieving the socially optimal quantity of carbon Q* depends on whether we can calculate the value of Q*.
• Evaluating tradable Permits - Why is it difficult in practice to achieve the social optimum?

  • Some costs (& benefits) could occur in the future, and are difficult to “discount“ to current prices.
  • We may not be aware of all of the externalities i.e. information gaps.
  • Different opinions on the value of the externality - they are not traded on markets and so there is no market price.
• What are the pros of tradable pollution permits?


  • Firms can trade
  • Government revenue
• What are the cons of tradable pollution permits?


  • Some firms argue that they use carbon off-setting