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ECON DB2 - Essay Example

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Cap and trade essentially refers to a market strategy that attempts to cut down the environmental effect of large-scale pollution emitters without necessarily crashing the economic activities going on within an economic system (Burtraw, and David, 2008). In other words, it is a…
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Analysis of Cap and Trade Issues Details: al Affiliation: Analysis of Cap and Trade Issues
Analysis of Cap and Trade Issues
Cap and trade essentially refers to a market strategy that attempts to cut down the environmental effect of large-scale pollution emitters without necessarily crashing the economic activities going on within an economic system (Burtraw, and David, 2008). In other words, it is a model that attempts to rewards energy innovation with eventual effect of slowly curbing down the harmful greenhouse gas emitted into the atmosphere through government-mandated policies. Cap and trade policy mechanisms basically set limits (referred herein as a “cap”) on the amount of carbon dioxide emissions emanating from the usage of fossil fuels by large scale energy users such as manufacturing industries.
Cap and trade allows for tradable pollution permits. A tradable permit policy sets specific targets on total emissions and allows reallocation or auctioning of pollution permit allowances to industry polluters to meet their objectives. Companies that are able to limit their emissions more cost-effectively have the incentive to avoid purchasing more permit allowances and even sell their permit allowances in excess to polluters with higher demand of compliance. Under this type of approach, emission are set by the cap, however, the overall costs for compliance may be uncertain.
With regards to Cap and Tax, a regulatory system is set that provides incentives for polluter companies to find cost-effective mechanisms for controlling their emissions. Firms will therefore pay taxes for their emissions if at all it is cheaper or reduce their emissions to avoid the imposition of tax for their damages to the environment. In cases of taxes to regulate emissions, the cost of compliance is known, but the levels of emission may be rather uncertain.
Economic benefits of using a command and control approach
A command and control approach sets fourth Emissions standards that are generally more stable as compared to carbon market controls. It is undeniable fact that trading markets, more so for carbon emissions can be unpredictable. Profiteering requires stability with a fairly of a secure investment decisions. With preset Emissions standards, companies can plan and diversify their investments into more energy efficient technologies that results into emission of emit less carbon.
Economic Benefits Of Using A Market-Based Approach Through Cap And Trade
A key benefit of market mechanism is that it gives incentives for innovative continuous emissions reduction. In cases of inflation, market mechanisms are advantageous because they allow automatic adjustments to new prices and as such no legislative action is needed.
Relationship between the Coase Theorem, Pigouvian tax and the cap and trade issues
The Coase Theorem allows assignment of property rights to pollution and thus giving lee way for markets to correct pollution externalities.
The pigouvian taxation on the other hand allows companies/plants) to choose the levels of pollution that helps them maximizes their revenues (profits).
Externalities that play a role in CO2 reduction Policies
An externality refers to a cost or a benefit of activities that result to damages to others with no compensation delivered to such third parties by those who create them. A number of positive and negative externalities play major roles in the ultimate regulatory decisions. The most significant of these is the average increase in the temperatures of the Earths surface with detrimental effects on agricultural activities. Nevertheless, it is to be remembered that it is through emission of such harmful gases into the atmosphere that actually results into some of the basic commodities that man needs to survive (Daigneault, and Steve, 2008).
It is important to note that reduction of greenhouse gases globally is impossible without the participation of every single nation. The deliberations that ended into the signing of the Kyoto protocol was a step in the right direction that should never be forfeited. Most importantly, the inclusion of the United States is deemed helpful into drawing up expected pollution levels of every nation. Otherwise, the worlds greenhouse gas emission levels may end up causing more disasters than currently the case.

Burtraw, Dallas and David A. Evans. 2008. "Tradable Rights to Emit Air Pollution."
Forthcoming in Australian Journal of Agricultural and Resource Economics. 53(1):59-84.
Daigneault, Adam, and Steve Newbold (2008). Climate Response Uncertainty and the
Unexpected Benefits of Greenhouse Gas Emissions. NCEE Working Paper Series. 2008-06. Read More
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