Trade Pollution Permits Flashcards
What is a pollution cap
A pollution cap is a limit put on the amount of emissions firms are allowed to emit in a year
Where is this pollution cap set
At the social optimum point of pollution
What does the government do after the cap is set
The government allocates permits (free or at a charge) which allow firms to pollute up to this limit. These permits are tradeable
What effect does this have on firms (trade pollution permits)
- Firms emissions are monitored, so firms who emit under the cap are able to sell their excess permits -> allow for profits
- firms who emit above the cap will be fiend and have to buy extra permits -> increase costs
What effect does these permits have on firms decisions
Firms have decisions to make they can either;
- invest in greener technology
- or buy more permits
What effect does the trade pollution permits have
The externality is internalised so firms pay the costs of the societal costs of pollution
What benefits does this policy have
- decreases pollution levels so negative externality is minimised
- incentivises investments into green technology
- incentivises being greener as it allows permits to be sold -> increase profits
- government can increase revenue by charging firms for permits
- leaner firms benefit and less environmental firemdly firms suffer
How does the permits incentivise greener technology investment in the long run
- firms will save permits which allows them to be sold for a profit
- they are not burdened in the future If permit prices increase
How do cleaner firms benefit and less clean suffer
Cleaner firms do not have to buy permits and can sell permits for a profit
- less clean age to buy more permits which increases costs of production for the firm
What are some cons of this policy
- enforcement of this policy is expensive and cannot be afforded in ledcs, give me et stay nto have sufficient technology to measure emissions accurately-> policy si ntk as effective
- imperfect information -> governments may not know where the social optimum is which can lead to insufficient permits allocated or tooc loose
- unintended consequences
- needs international co operation
What are some unintended consequences of this policy
- increase the costs of production for firms -> can lead to them passing on higher prices to consumers
- firms may leave the industry -> less choice
- may leave for other countries
- lower consumer welfare
- pressure to cut costs may lead to unemployment
Why is international co operation needed
International co operation is needed as pollution is a worldwide probelm so co operation form all countries is needed to make a difference
- many countries are reluctant to increase costs of production -> ledcs going through industrialisation who want to increase economic growth
- do not want to decrease economic competiveness
