Week 10 Flashcards
What is the marginal rate of substitution also known as?
the indifference curve
What is the potentially non-linear relationship between output and emissions?- it is an equation
Co2 = F(q) = kQ
for every unit of output there is a fixed emissions - emissions cause some kind of damage
look at what is happening in BAU and how emissions can be mitigated from there - what are the costs and benefits associated with these emissions
What is an example of a non-market based policy for mitigation/abatement?
emissions targets
bans
i.e command and control
what is an example of market-based mitigation policies or abatement policies
carbon taxes and cap and trade
taxes are priced based
cap and trade is quantity based
Is there a preference between market based and non-market based policies?
market based is thought to be more efficient because it generates the most amount of reduction in the cheapest way
What is the theoretical impetius behind cap and trade ?
environmental external effects arise because there is missing markets
How does cap and trade work?
cap and trade creates a market for emissions
- Government sets a limit (cap) on pollution and creates enough permits to meet this cap
- Goverment allocates permits - via an auction, or giving it freely to firms - and firms buy/sell permits amongst themselves
this creates a market for trading carbon credits
How did the Eu ETS work?
not everybody and everything is regulated eg. not all factories
- calculated how much would be polluted by everyone at a reference date
- then you fix a point where you want to reduce emissions by - eg. a percentage point of every year and then you issue permits in line with this reduction pathway
there must be a cost relative to what you are emitting - but individual players might have a net benefit and are able to invest in equipment that reduced their emissions
as there is a trading of permits there is a determination of the price of the permits
why is cap and trade more efficient?
- the regulator decides how much has to be abated or reduced in terms of emissions of all the polluters
- if there are 2 firms with different abatement costs, then trade between the firms of carbon permits can benefit both firms as long as the the cost of abating for the lesser firm doesn’t go beyond the price that the other firm is willing to pay
therefore you reach an equilibrium and pareto efficiency
- the government doesn’t need to know each firms MPCA curve - doesn’t require much information
What characterises an equilibirum in the carbon market?
The two firm lines must intercept
the emissions cap must be met
What is the equation for the finding the right price for permits?
(hint) that includes the two key elements required for equilibrium price
Price = aBaA+ bBaA - bBbA x cap /bA+bB
benefit characteristics and cap are accounted for
what happens to price if there is a high cap?
high cap = low price
What idea does a tax reflect in terms of carbon pricing?
the issue with externalities is that they are not reflective of the true costs and benefits as a consequence of the activity
How do you choose a policy if there is uncertainty?
Weigh up which policy has a bigger loss from mis-understanding of something the one with the least deadweight loss is the one you should go fo
What is the relationship between the steepness of the marginal damages curve and which policy should be chosen?
steep marginal damages curve and flat marginal costs curve the case for cap is stronger than a tax
