Define limit
A limit is set on the total amount of pollution (CO2) firms are allowed to emit over a period e.g. a year. Set in line wiht commitments made in Intl agreements e.g the paris agreement
How do pollution permits work?
- government allocates pollution permits to firms (either for free or at a cost). The permits allow firms to pollute up to the limit set. These permits can be trade so they are known as tradable pollution permits
How are pollution permits traded?
The government monitors the emissions of firms. If firms pollute below the levels set, permits aren’t used so they can be sold. If a firm breaks the pollution limit, they will face fines unless they purchase pollution permits.
Why will firms that are heavy polluters suffer as a result of a cap and trade scheme?
They have to pay fore more permits, higher production costs so small businesses will go bankrupt or leave the market - unintended conequences
Why will firms that act to reduce emissions be rewarded through emissions trading?
can sell permitd to generate revenue
How does a cap and trade scheme aim to reduce emissions?
incentivises them to innovate and use more efficient methods of production/renewable energy
Pros of maximum prices?
prices are lowered for consumers
Pros of minimum prices?
- In agricultural markets, food stability is increased.
+ farmers income is guaranteed with minimum prices so food supply guaranteed as no one leave market
Can reduce consumption of demerit goods such as alcohol.
+ price set above equilibrium, affordability drops so less is consumer
Producer incomes are protected in agricultural markets
+ prices set above equilibrium so producers have a base to fall back on (otherwise commodity prices are volatile)
Describe the emission trade scheme
A market is created for buying and selling pollution permits → the price mechanism is used to internalise the external costs of carbon emissions
Pros of the emission trade scheme?
- Incentive given to invest in pollution reducing technology.
- Cleaner firms rewarded and less environmentally friendly firms punished
Unused permits can be sold or banked → further incentive to reduce
carbon emissions.
Revenue could be raised by selling the permits rather than giving them away for free.
What pros of the ETS doesn’t apply to carbon tax
all firms pay carbon tax and no reward for being enviro friendly
Define regulation
a rule or law enacted by the government that must be followed by economic agents. It used to encourage a change in behaviour.
Examples of command regulation
1) Ban e.g. public smoking ban.
2) limit e.g. age limits on buying alcohol, time limits on when alcohol can be
served.
3) caps e.g. carbon emissions caps or fishing caps.
4) Compulsory actions e.g. graphic health warnings on cigarette packets.
Examples of control regulation
1) enforcement
2) punishment e.g. fines or jail sentences
Disadvantages of maximum prices
1) Shortage created → Goods and services may be distributed on a first-come, first-served basis or seller’s preference. → This is often deemed unfair.
2) Black market may emerge.
Costs of enforcement → opportunity cost
3) Difficult to set price at the right level. There may be an information gap which
leads to the price being too high or too low.
4) Rental market – Producer surplus falls → landlords have less money to invest and maintain their property → long-term decline in the quality of the housing
stock
What are the disadvantages of emission trading scheme
1) If there is an information gap → too many permits could be issued → little/no incentive for firms to reduce pollution
2) If there is an information gap → too few permits could be issued → reduces international competitiveness → decline in X-M, employment, and growth
3) Producers may try to pass the added costs on to consumers. Price inelastic goods and services are likely to become more expensive e.g. electricity, steel, glass.
4) Price may be volatile which createsuncertainty for business.
5) If permits are given away for free, it’s a missed opportunity to raise gov revenue
6) costs of operating and monitoring the scheme.
7) Competitor firms in other regions, such as China and the US, are not currently subject to emissions trading schemes which improves their relative competitiveness
Cons of minimum prices
- excess supply created → some producers unable to sell goods → potential for losses.
- higher prices for consumers. Lower consumer surplus.
The excess supply represents a waste of resources that could have been used more productively elsewhere.
State spe methods of gov intervention
o indirect taxation (ad valorem and specific)
o subsidies
o maximum and minimum prices
b) Other methods of government intervention:
o trade pollution permits
o state provision of public goods
o provision of information
o regulation
What is Eu ETS
eu emission trading scheme is a tradable pollution permit scheme with permits called emission allowances. These allowances are distributed between EU member govsernemtns who in turn allocate the allowances to firsm
What is Eu ETS
eu emission trading scheme is a tradable pollution permit scheme with permits called emission allowances. These allowances are distributed between EU member govsernemtns who in turn allocate the allowances to firsm
