Cap And Trade - 1.4 Flashcards
What is Carbon Trading?
Carbon trading is a form of pollution control that uses the market mechanism to change relative prices and the incentives of producers and consumers to reduce their total carbon emissions.
Name a Trading scheme example and explain who it involves and what is the aim of it.
The EU Carbon Emissions Trading Scheme - it’s a cap-and-trade scheme for carbon dioxide.
Operates in 31 countries, with 3 non-EU countries (Iceland, Liechtenstein and Norway)
Covers 45% of the EU’s greenhouse gas emissions that come from energy intensive sectors.
What are the problems when calculating with the social optimum?
Some costs and benefits could occur in the future, and are difficult to ‘discount’ to current prices.
We may not be aware of all of the externalities (information gaps)
Different opinions on the value of the externalities: they are not ‘traded’ on markets and so there is no market price
What is grandfathering and why is it a problem?
Older industries that already exist abide by the old rules, while new firms would have to abide by the new rules.
This would mean initially, it would mean permits are given away at a low or zero price.
This leads to a lack of incentive to invest in greener alternatives.
What is the consequence of the regulator having a poor understanding of the market?
Carbon price volatility - still too much information failure, which means that the social optimum will never be reached.
This gives a lack of incentive to invest in green alternatives/temptation to act illegally (especially when carbon prices fluctuate and become more expensive)
Other issues of cap-and-trade schemes?
Which businesses are included?
Impact on international competitiveness
Intense industry lobbying has led to excess permits
Some ‘dodgy’ carbon offsetting
Shifting production to developing economies
6 benefits of carbon trading schemes?
Relatively low-cost solution
Uses the price mechanism, therefore ‘efficient’ (in theory)
Firms are able to choose how and where to reduce their emissions
Revenues are generated from the initial sale of permits, which could be hypothecated into greener alternatives
Encourages the sharing of information between firms and governments regarding CO2 emissions, which improves the quality of other responses and policies
Estimates suggest that European emissions are 24% lower than they would have been without the ETS
Pros of carbon taxes
Makes the polluter pay
Predictable for businesses
Tax revenue can be hypothecated to solve pollution issues
If managed well, will apply to imported goods as well as domestically produced goods
Cons of carbon taxes
May be inelastic PED for the goods produced so the tax will have little effect on pollution
May lead to structural unemployment in carbon-related industries
Could affect international competitiveness
May be regressive, hitting the poorest hard
Name a country using a tax rather than cap-and-trade
Sweden CO2 tax (first introduced in 1991, Euro 137 per tonne)
