2.11 Government Intervention (TRADABLE POLLUTION PERMITS)) Flashcards
(26 cards)
What are tradable pollution permits?
Tradable pollution permits are licenses issued by a government that allow firms to emit a certain amount of pollution; these permits can be bought and sold between firms
when do the government get the revenue
govt get revenue from first initial buying
What is the purpose of tradable pollution permits?
to reduce pollution by giving firms a financial incentive to cut emissions and sell unused permits, creating a market-based solution to negative externalities.
How do tradable permits work in practice?
The government sets a pollution cap, issues permits, and allows firms to trade them. Firms that reduce emissions can sell their extra permits; those that pollute more must buy additional permits.
Give an example of a tradable permit scheme.
the EU Emissions Trading System (EU ETS) is the world’s largest carbon trading scheme, targeting greenhouse gas emissions in energy and industrial sectors.
draw a graph to show tradable pollution permits
Demand shifts outwards- to the right. increased demand
Supply is a vertical line to show there is only a certain amount of supply permits. This line shifts left. this shows a decrease in supply of pollution
price increases
quantity decreases
why is supply a vertical line on the graph
the government issue a fixed amount of pollution rights in the economy. Therefore supply is perfectly inelastic as it cannot change
what happens when there is an increase in demand for pollution permits (the legal right to pollute)
demand will shift from D to D1 and the price of the tradable permits will increase
if the government enforces stricter pollution control what will happen to supply
supply will shift to the left and decrease
they reduce the number of tradable permits from Q to Q1. This will lead to a shift in the supply curve to S1 leading to higher cost to firms of creating pollution.
what does this intervention make firms do
makes firms either pay more for the right to pollute of the govt or they will reduce their pollution output.
Those who do not need their permits will sell them on the market. Financial Incentive to not produce as much pollution to be able to sell for profit.
create a flow diagram about the knowledge on tradable pollution permits
pollution permits allow firms to produce a legal level of pollution every year.
permits are tradable on the market
if a firm does not use all of its permits it can sell them to other firms that pollute above their allowance
this provides a financial incentive for firms to reduce pollution
trading schemes seek to reduce C02 emissions globally
what are the advantages of this scheme
- relatively low cost solution
-uses price mechanism, therefore efficient
-firms are able to choose how and where to reduce their emissions
- revenues are generated from the initial sale of permits, which could be hypothecated into greener alternatives
-encourages the sharing of information between firms and governments regarding C02 emissions, which improves the quality of other responses and policies
-cost effective, saving money and resources
-puts a cap on the level of pollution. benefiting the environment
-the lower pollution of a firm, the more they can benefit. this is a financial incentive which encourages firms to lower their pollution levels as they can go on to sell their permits
- The government makes revenue from initial buying off firms which can be re- invested to the economy.
what are the disadvantages of this scheme
- deciding on the level of pollution is difficult
-there is a cost to implementing the scheme and administration costs
- difficult to work out how much C02 has been emitted. Firms will underestimate what they have really produced
-can lead to cheating and emission scandals (VW)
-firms may pass the price of purchasing pollution permits on to their customers, leading to higher prices.
How do tradable permits differ from pollution taxes?
Permits control quantity and let the price adjust
Taxes set the price of pollution, and the quantity emitted varies
What type of market failure do tradable permits address?
Negative externalities, especially environmental pollution, by internalising the external cost of emissions.
What is a carbon tax?
A carbon tax charges firms a fixed amount per unit of carbon emissions to internalise the negative externality of pollution.
What is a tradable pollution permit?
A pollution permit gives firms the right to emit a set amount of pollution, which can be bought or sold in a market, limiting total emissions.
What do both carbon taxes and pollution permits aim to achieve?
Both aim to internalise negative externalities, reduce carbon emissions, and encourage firms to innovate or reduce pollution.
What is the main difference in how they control pollution?
Carbon tax: Controls the price of pollution, but the level of emissions is uncertain.
Permits: Controls the quantity of emissions, but the market determines the price.
What are advantages of carbon taxes?
Easier to implement
Provides predictable costs for firms
Generates revenue for government
Encourages cleaner production if set correctly
What are disadvantages of carbon taxes?
Hard to know the optimal tax level
May not reduce emissions enough
Can be regressive, hitting lower-income households harder
May lead to tax evasion or relocation of firms
When might a carbon tax be preferred over permits?
When price certainty is important and emissions levels are harder to monitor, especially in developing regulatory systems.
When might permits be preferred over a tax?
When the government wants to guarantee an emissions cap (e.g. to meet climate targets), even if prices fluctuate.
draw a graph to represent tax on carbon
price increases for producers do to increases tax from P1 to P2
Demand curve stays the same
Supply shifts inwards from S1 to S2+tax. as producing products is now more expensive so firms will produce less
Tax is shown with a vertical line between both supply lines
quantity decreases
tax shifts supply to the left and makes firms pay the full social marginal cost of pollution. It raises the market price to P2
