MICRO - LS21 - Tradable Pollution Permits

Question 1

What do governments set to do with pollution

Answer 1

• A limit (cap) on the total amount of pollution (CO₂) firms are a,lower to emit over a period e.g. a year
• could be set in line with commitments made internationally e.g. Paris agreement

Question 2

What does the government allocate

Answer 2

• pollution permits to firms (free or at a cost)
• allows firms to pollute up to a set limit - can be traded so known as tradable pollution permits
• gov monitors emissions of firms
• if firms pollute less then permits not used can be sold
• if firms breaks the limit have to purchase more permits or be fined

Question 3

Advantages of minimum and maximum prices

Answer 3

maximum prices
- prices lowered for consumers
minimum prices
- in agricultural markets food stability is increased
- can reduce consumption of demerit goods e.g. alcohol
- producer incomes are protected in agricultural markets

Question 4

What does ETS stand for

Answer 4

Emission trade scheme

Question 5

ETS advantages

Answer 5

• market is created for buying & selling pollution permits —> price mechanism is used to internalise the external costs of carbon emissions
• incentive given to invest in pollution reducing technology - ideally use income made by selling permits to invest
• cleaner firms rewarded and less environmentally friendly firms punished
• unused permits can be sold/banked (keep them) —> further incentive to reduce emissions
• revenue can be raised by selling permits instead of giving them away for free