Micro Theme 1 1.4 Flashcards
(13 cards)
what government interventions can help to reduce negative externalities and therefore correct market failure
introduce a tax
what is carbon tax
is a tax on the consumption or production of goods and services, which cause carbon emissions. Policy designed to make the polluter pay for externalitites caused
What is government intervention
Refers to action taken by a government to influence or regulate economic activity, often to address market failures or achieve specific economic goals
What does a tax on carbon cause a change in the externality diagram (2)
- It increases the private cost of emitting carbon- in theory this will cause output to contract towards the social optimum (where MSC is).
- A carbon tax will raise tax revenues which would be used by gov and to fund clean energy projects
What is carbon trading
And the aim
- Also known as emissions trading, is a market- based approach to controlling pollution by providing economic incentives for reducing the emissions of greenhouse gases especially carbon dioxide
- Goal to reduce overall emissions by creating financial motivation to emit less, companies reduce emissions cheap can sell their extra allowances to others for profit
How does a cap-and-trade system work
- governments or international bodies set a cap on the total amount of greenhouse gases that can be emitted
- companies are given it can buy emissions allowances (also called carbon credits) that let them emit a certain amount
- if a company emits less than its allowance, it can sell the surplus to others who need more
What are advantages of the cap and trade system (4)
- Market based efficiency (encourage firms to reduce emissions cost-effectively by trading surplus credits)
- Financial incentives to innovate (promote investment in clean tec and renewable energy)
- Flexible compliance (companies choose how to meet targets- charge emissions/buy credits)
- Gradual transition (provides way for industries to transition away from fossil fuels without sudden disruption)
What are disadvantages of the cap and trade system (4)
- Risk of manipulation and fraud (some companies may inflate emissions data or sell non genuine offsets)
- uneven impact ( wealthier companies or countries can buy their way out of reducing emissions =environmental injustice
- complex monitoring and enforcement (required robust systems to track emissions =costly and complex)
- may delay real change (if credits too cheap/ too abundant, companies may buy credits instead of reducing emissions)
What is carbon border tax
When EU proposing one
- Aims to reduce emissions by placing a tariff on imports from countries with less stringent climate policies
- idea is to level the playing field for domestic companies that are subject to carbon pricing or other climate regulations by preventing foreign companies from gaining advantage through lower costs
- requires importers to pay a fee for the carbon emissions embedded in the products they exporting
- EU developing carbon tax mechanism set to introduce in 2023
What are the advantages of a carbon border tax (3)
- encourage countries with weaker climate policies to take action to reduce their carbon emissions
- protects domestic industries- help to prevent “carbon leakage” occur when companies move production to countries with weaker climate policies
- green tariffs generate revenue for climate action (eg renewable sources)
What are disadvantages of carbon border tax (2)
- could lend to a trade dispute if it is seen as a protectionist measure (hamper exports from poorer countries)
- Would increase cost of imported goods, which could lead to higher consumer prices. Have a regressive impact on low income households
What are positives of regulating activities causing negative externalities (3)
- they act as a spur for business innovation to cut the level of carbon emissions
- regulations may be more effective if demand is unresponsive to price changes
- regulations can be gradually toughened each year (help stimulate investment)
What are the disadvantages from adding extra regulation of industries (3)
- High cost of enforcement/ administrative of strict laws
- regulations can lead to unintended consequences/ cause government failure
- the cost of meeting regulations can discourage small businesses and lead to less competition in markets
