Pollution Permits

Question 1

What are Pollution Permits, and how do they work?

Answer 1

Pollution permits involve giving firms a legal right to pollute a certain amount e.g. 100 units of Carbon Dioxide per year.

• If the firm produces less pollution it can sell its pollution permits to other firms.
• However, if it produces more pollution it has to buy permits from other firms or the government.
• This creates a market for pollution permits with the price set by demand and supply.

Question 2

What are the aims of Pollution Permits?

Answer 2

• The aim of pollution permits is to provide market incentives for firms to reduce pollution and reduce the external costs
  associated with it.
  For example, it is argued carbon dioxide emissions contribute towards global warming.

Question 3

Strengths of Pollution Permits?

Answer 3

• Firms have an incentive to invest in clean technology. (to not buy more permits)
• Firms are able to bank/sell their excess permits for future use. (reward for efficient companies)
• Doesn’t affect everyone the same, heavy polluting businesses are targeted more than lighter polluters.
• Pollution permits can also be a way for the government to raise revenue, by selling firms these permits to allow pollution.

Question 4

Drawbacks of Pollution Permits?

Answer 4

• The EU is only one part of the world, unless all countries engage in similar carbon trading schemes, global emissions will continue to increase.
• Firms may pass the cost of purchasing pollution permits on to their customers leading to higher prices.
• It is difficult to know how many permits to give out. The government may be too generous or too tight.
• It can be difficult to measure pollution levels. There is potential for hiding pollution levels or shifting production to other countries, with looser environmental standards. In a globalised world, multinationals increasingly shift production around.
• There are administration costs of implementing the scheme and measuring pollution levels.
• For global pollution permits, countries who pollute more than their quotas can simply buy permits from other countries. Therefore rich developed countries can simply buy permits from less developed countries. This does not significantly reduce pollution but shifts it from the richer countries to poorer countries.

Question 5

Depends on?

Answer 5

• Prices of fines
• PED for permits