Tradeable Pollution Permits

Question 1

State + explain the micro effects of implementing tradeable pollution permits.

Answer 1

• Incentivises Emission Reduction: firms that reduce pollution can sell permits for profit - encourages cost-effective abatement.
• Internalises Externality: pollution now has a price - improves allocative efficiency (MSB = MSC).
• Encourages Innovation: firms incentivised to I in cleaner tech to lower pollution C.
• Flexibility For Firms: firms can choose to reduce pollution or buy permits - more efficient than blanket regulation.
• Increased Costs For Polluting Firms: especially affects energy-intensive industries - may lead to higher P for consumers.
• Market Power Issues: large firms may buy up permits, raising P + limiting access for smaller firms.
• Monitoring + Enforcement Issues: difficult to accurately track emissions + prevent cheating / overuse.

Question 2

State + explain the macro effects of implementing tradeable pollution permits.

Answer 2

• Improves Environmental Quality: leads to lower overall emissions - step toward sustainable development.
• Stimulates Green Industry Growth: LR shift in D towards low-carbon sectors, potentially boosting employment.
• Inflationary Pressure: higher production C may be passed onto consumers - cost-push inflation.
• Reduced International Competitiveness: domestic firms may face higher C than foreign rivals - leading to ‘carbon leakage’ - firms relocating to whereby there aren’t tradeable pollution permits.
• Uneven Impact Across Industries: some sectors hit harder (e.g. steel, cement) - possibly leading to job losses or regional decline - link to exacerbated income inequality.
• Macroeconomic Uncertainty: volatile permit P may create unpredictability for firms + investors.