Please answer ONE of the following questions. About 1⁄2 a page of medium sized handwriting. i) Discuss pros and cons of cap and trade in comparison to emissions standards and taxes based on TWO criteria. OR ii) Discuss two ways economists estimate and monetize climate change damages. OR iii) Discuss pros and cons of allowing international forest offsetting in cap and trade markets. OR iv) Explain factors that affect the economist’s choice of social discount rates and how this affects their advice on how fast to abate and carbon price trajectories.

QUESTION

Please answer ONE of the following questions. About 1⁄2 a page of medium sized handwriting.

i) Discuss pros and cons of cap and trade in comparison to emissions standards and taxes based on TWO criteria. OR
ii) Discuss two ways economists estimate and monetize climate change damages. OR
iii) Discuss pros and cons of allowing international forest offsetting in cap and trade markets. OR iv) Explain factors that affect the economist’s choice of social discount rates and how this affects their advice on how fast to abate and carbon price trajectories.

ANSWER

Pros and Cons of Cap and Trade Compared to Emissions Standards and Taxes

Introduction

The adoption of effective climate change mitigation strategies is crucial for the long-term sustainability of our planet. Among the various policy tools available, cap and trade, emissions standards, and taxes are commonly used to reduce greenhouse gas emissions. This essay aims to discuss the pros and cons of cap and trade in comparison to emissions standards and taxes, considering two criteria: economic efficiency and flexibility.

Economic Efficiency

Cap and trade systems offer several advantages in terms of economic efficiency. By setting a specific emissions cap, this approach ensures a predetermined level of emissions reduction. This certainty allows for better planning and allocation of resources for companies. Moreover, cap and trade systems create a market for emission permits, incentivizing companies to innovate and find cost-effective ways to reduce emissions (Reichle, 2023). This encourages the development of cleaner technologies and promotes long-term sustainability.

On the other hand, emissions standards focus on regulating the maximum allowable emissions level for specific sectors or activities. While providing certainty regarding emissions limits, this approach may not incentivize companies to go beyond compliance requirements. Consequently, it may hinder technological advancements and limit the potential for emission reductions.

Taxes, as an economic instrument, can provide flexibility and encourage emission reductions across various sectors. By imposing a price on carbon emissions, taxes create an economic disincentive for polluters. The revenue generated from carbon taxes can be used for various purposes, such as investment in renewable energy or compensating affected communities. However, the effectiveness of taxes depends on setting the right price, which can be challenging to determine, and they may not provide the same level of certainty as cap and trade systems.

Flexibility

Cap and trade systems offer flexibility by allowing companies to trade emission permits. This enables firms that can reduce emissions at a lower cost to sell excess permits to those facing higher abatement costs (Kenton, 2020). As a result, emission reductions can be achieved in the most cost-effective manner, leading to overall economic efficiency. Cap and trade systems also allow for international offsets, where emissions reductions made in other countries can be credited, providing flexibility for companies to achieve their reduction targets.

In contrast, emissions standards provide a clear regulatory framework but may lack flexibility. They require companies to meet specific emissions standards without the option to trade or offset emissions. While this approach ensures compliance, it may not consider varying industry-specific circumstances or technological advancements.

Taxes offer some flexibility as they allow companies to choose how they reduce emissions to avoid the tax. However, they do not provide direct incentives for emissions trading or international offsets, limiting flexibility in comparison to cap and trade systems.

Conclusion

In conclusion, cap and trade systems have distinct advantages compared to emissions standards and taxes in terms of economic efficiency and flexibility. They encourage innovation, provide market incentives for emission reductions, and allow for trading and international offsets. However, each policy tool has its own strengths and weaknesses, and the choice between them depends on the specific context and objectives of policymakers. To effectively tackle climate change, a combination of these instruments, tailored to the unique circumstances of each sector or country, may be the most appropriate approach.

References

Kenton, W. (2020). Cap and Trade Basics: What It Is, How It Works, Pros & Cons. Investopedia. https://www.investopedia.com/terms/c/cap-and-trade.asp 

Reichle, D. E. (2023). Carbon, climate change, and public policy. In Elsevier eBooks (pp. 503–570). https://doi.org/10.1016/b978-0-443-18775-9.00015-2