1.4.1 Pollution Permits And Carbon Taxes Flashcards
What are the two main types of carbon pricing mechanisms
- cap and trade systems (pollution permits)
- carbon taxes
What are pollution permits
Place a cap on the total amount of carbon emissions and allow companies to trade emissions permits
Who issues pollution permits and who to
The government, to firms
What do pollution permits do
Allow firms to pollute up to a certain limit
What happens to any pollution above this level
Subject to heavy fines
What can a firm do if they do not use all their permits
They make sell their permits to firms in need of extra allowance- this creates a market
What do you need for a market to exist
- laws
- buyers
- sellers (firms who have surplus carbon permits)
What is the EU emissions trading scheme
A cap and trade system that’s designed to reduce greenhouse gas emissions in the EU
What happens to the supply of permits over time
Reduced
How do permits reduce emissions
As the supply is gradually reduced, this leads to a higher price and a higher cost of production, creating an incentive for firms to invest in lowering emissions
How is the effect of pollution permits seen
- increased costs reduce supply and thereby reduce pollution
- encourages firms to adopt more environmentally friendly methods that reduce pollution
- encourages firms to reduce their emissions so they can sell their permits for a profit
What are the pros of pollution permits
- firms have a direct incentive to lower pollution to reduce costs or increase profits from resale
- a market is created, therefore the price mechanism is used to internalise the internal costs - more efficient
- permits are reduced over time, reducing long term pollution
- government gains revenue from the sale of permits (can be reinvested)
What are the cons of pollution permits
- only applies to EU firms, reducing their global competitiveness
- most firms are likely to pass increased costs on to the consumer as demand is very price inelastic
- information gaps in valuing external costs may cause too few permits to be issued
- not effective in a recession when there is reduced demand for permits, lowering price and discouraging firms from making changes
What does the impact of pollution permits depend on
- whether firms relocate to an area where pollution permits are not enforced
- whether government adequately monitor pollution to ensure firms stay within permitted level
- whether government heavily fine firms above permitted level in order to create incentives
Define a carbon tax
A tax on the consumption or production of goods and services that cause carbon emissions. It is a policy designed to make the polluter pay for the externalities created by
What can the revenue from the carbon tax be used to fund
Government programs that reduce emissipns
What are the benefits of carbon taxes
Often seen as a simpler and more transparent way to reduce emissions than trading systems
