Lecture 6: Marketable Permits Flashcards
Learn tax diagram
Lecture 6 page 2
How do permits work? (3 stages)
1) regulatory authority decides on total emission levels for a particular pollutant that can be allowed for that year
2) they then issue permits to firms, each permit allows the firm to pollute a particular amount
3) firms are then free to trade permits between themselves
What is the idea behind permits?
Permits are based on the idea that any increase in emissions must be offset by an equivalent decrease elsewhere (emissions ceiling).
What is marginal abatement cost (MAC)?
Marginal abatement cost is the cost of not emitting one additional unit of pollution.
What happens is MAC>permit price?
The firm will not abate but will buy the permits
What happens in MAC
The firm will abate and sell its spare permits
What is grandfathering?
The way that the authorities decide how many permits to give each firm - they look at the firms historical level of emissions and sell the permits accordingly.
How do permits reduce pollution in the long run?
Over time the authorities reduce the emissions ceiling, thus leading to less total emissions each year.
Learn diagram for supply of permits
Now
How is the MAC curve represented?
It can be thought of as a demand curve for permits
How does the government achieve the socially efficient level of output using taxes?
They have to set the tax at the level where MNPB = MEC
How does the government achieve the socially efficient level of output using permits?
The government has to set supply of permits at the level where MAC = MEC
Numerical example page 9
Now
2 benefits of permits over pollution taxes?
Permits set an actual limit on pollution levels, but taxes only raise the price of polluting
If different firms have different marginal abatement costs it is inefficient to make all firms cut pollution by the same amount
What is netting?
A procedure whereby a firm can create a new emissions source if they offset the additional emissions by a reduction in emissions elsewhere in the firm.
