Cap and Trade Policy Paper Essay

IntroductionThe issue of blow emissions is an key one not notwithstanding from an environmental perspective scarce withal an stintingal one. While reducing coke copy emissions is an important one for the wellness of human beings as well as that of the environment, the adultr motility is what pillowcase of polity strategy is best for both reducing such(prenominal) emissions which readiness wee-wee an impact on efforts to mitigate the effects of taint on climate change.While ther argon options to consider which does not rely on economics technological or output standards achieved by command and require regulationsthey are often fraught with political resistance by attention because they do not all toldow industry to make any choices or play a role in solving the problem of ebullient emissions and the saddle that these emissions place on opposites. Instead of such draconian measures found on fiat, the preferable options rely on economic tools instead to offer incentives to industry to police itself by either incenting investment in emission-reducing and/or energy saving technologies or to overcome product in suck with the sum intact/ companionable- bes rather than just the private/ producer- terms of production. Two such economic policies to consider in this see are emission imposees and cap-and-trade policies.Overview of constitution business degree Celsius emissions reductionConsider a company that faces an increasing peripheral pollution pause personify curl as in the blueprint 1. Left unregulated it will choose not to reduce its carbon emissions (a.k.a diminish carbon emissions) and avert facing the be of suspension be by the area underneath the borderline clock out embody curve represented by area (B + C + D) in the diagram below. build 1 marginal Costs and Marginal Benefits of Reducing cytosine Emissions pic denotation Econ 101 ascorbic acid taxationation vs. capital-and-Trade, 2012, n.pag. Suppose tha t constitution analysts have resolved that the economically high-octane aim of pollution abatement occurs at the prognosticate where marginal goods of abatement equal the marginal comprise be of abatement as is suggested in economic theory. The get outing level of carbon emissions is e* (reduction in emissions is thrifty from the far right in the diagram above to the pointe*). The question is what constitution to follow to achieve e* either several(prenominal) font of fiat policy involving either some type of output obstacle or requiring use of a particular pollution- underwrite technology or some type of policy that involves financial incentives to reduce emissions. This paper hypothesizes that policy options involving economic incentives are preferable to those options that involve regulatory fiat.Specification of Economic insurance Models1) A Carbon Emissions evaluateOne policy instrument that feces be used to achieve this level of abatement is to pile a tax wher e marginal benefit equals marginal cost represented by the horizontal tax melodic line in the enroll 2 below. chthonic such a scheme, the defiler will find that it is cheaper to reduce carbon emissions so long as the marginal cost is get down than the tax. Since the tax superlative (A + B) is great than the marginal abatement cost bill (B) to the left-hand(a) of the point e*, the unanimous will choose to reduce emissions up to the level of C with the remaining emissions level indicated in figure 2 mensurable from the right in the diagram. To the right of e*, the marginal abatement costs, represented by areas C + D, are greater than the tax bill (area D) so the solid will choose to pay the tax and exsert to emit pollutants beyond e*. Figure 2 The Carbon Emissions TaxpicSource Econ 101 Carbon Tax vs. hoodlum-and-Trade, 2012, n.pag. So long as the marginal costs and benefits of abatement can be known with certainty, an emissions tax can be fix up at the point of intersecti on of these devil measures resulting in an efficient level of pollution emissions at e* with total abatement costs (including taxes paid) to the polluter of area B+D and providing the organisation with r steadyues represented by D (Econ. 101 Carbon Tax vs. Cap and Trade, n. pag.). It is when these marginal costs and marginal benefits are either not mensural in their entirety or when thither is uncertainty about the figures discovered that leads to added questions as to whether this would be the best policy to follow.2) A Cap constitutionAn ersatz policy to an emissions tax to achieve reductions in emissions through the tools of economics is to set a cap at the point where marginal social benefit equals marginal social cost of reducing emissions/abatement represented by the vertical cap line in Figure 3 below. The polluting firm must reduce its carbon emissions to e* where the marginal social cost of reducing emissions equals the marginal social benefit of the products produce d by the polluter.Such a policyif the social costs and social benefits can be careful dead on targetlyresults in an efficient level of emissions produced/ trim at e* with an abatement cost borne byFigure 3 Cap constitution for Each FirmpicSource Econ 101 Carbon Tax vs. Cap-and-Trade, 2012, n.pag. the polluter uniform to area B (Econ. 101 Carbon Tax vs. Cap and Trade, n. pag.). The issue is whether total social costs can be careful and measured accurately in order to set such a policy at the correct or efficient level of emissions for separately firm. Normally such policies do not result in dexterity even though an efficient level of general emissions can be attained since it does not account for diametrical costs of abatement in antithetic firms. That is, a level of emissions can be attained that is homogeneous to that achieved under an economically efficient policy but the level is not achieved at the lowest overall cost.One way of obtaining individual caps is for the b rass to auction off emission permits that total the pre-set amount of emissions that it feels is optimal. Firms with higher(prenominal)(prenominal) costs of reducing emissions will put forward higher than firms with lower cost structures. Again, the only problem is determining what the total amount of emissions should be reflecting all social costs and benefits of reducing carbon emissions.3) A Cap-and-Trade PolicyAn added twist on the cap policy allows firms to trade emission allotments between themselves based on the buyer of allotment bargaining with the seller over the proper cost to pay for the extra allotment. A two-panel diagram is needed to better learn the logic of trading emission allotments. Figure 4 illustrates the marginal cost of reducing emissions of two firms. One firm is run on honest-to-god technology with high abatement costs that goes from right to left with zero costs represented at the lower right-hand corner of the diagram. The different firm has newer technology in its plant with lower abatement costs that goes left to right with zero costs represented at the lower left-hand corner of the diagram. The width of the horizontal axis is the reduction in emissions that must be achieved overall to an efficient level.The intersection of the two marginal cost curves is where economic force is achieved. That is, the value achievedFigure 4. Cap-and-Trade Between Firms PolicySource Econ 101 Carbon Tax vs. Cap-and-Trade, 2012, n.pag. from the last dollar expended on abatement must be the aforesaid(prenominal) across all firms in the grocery store. This is known as the equimarginal principle (Boyes and Melvin, 2011,122). The total cost of attaining the efficient abatement/emissions level is equal to the area C + G + K. At the efficient level of emissions, e*, the low cost (of reducing emissions) firm should reduce more emissions than the high cost (or reducing emissions) firm. Such a policy can be put oned by issuing carbon permits to dif ferent firms and allowing them to buy and sell their permits in the open market. Normally, equal amounts of permits are issued to from each one firm since it is difficult to assess the true abatement cost a priori. In the end, the marketplace will help determine the differences in cost structure depending on how high a firm is willing to bid for an extra permit or two (Econ. 101 Carbon Tax vs. Cap and Trade, n. pag.).As with the individual firm cap policy, the cap-and-trade policy is predicated on the disposal being able to determine the optimal level of total emissions desired reflecting social costs and benefits of reducing carbon emissions. Combining the different economic policy options together, it is obvious that it is possible to achieve the same level of reduction in emissions by setting a tax at the same level as where the marginal costs of reducing emissions is the same between firms which is at the level represented by the horizontal line in Figure 4 above. As above, th e polluting firms will notice that it is cheaper to abate carbon emissions as long as the marginal abatement cost is lower than the tax. The firms with the higher cost structure will reduce emissions to e* when measured from right to left and incur abatement costs equivalent to area K and pay taxes equivalent to area B+C+F+G. The firms with the lower cost structure will reduce emissions to e* when measured from left to right and incur abatement costs of C+G and pay taxes equivalent to areas J + K in Figure 4.Setting a cap on each individual firm will produce the same level of reduction in emissions, but given that it is difficult, if not impossible, to individualized caps based on different cost structures of abatement, an efficient outcome is difficult to achieve under such a policy even though emissions are reduced to the same overall level. Regarding the market failure referable to the negative carbon externality, both a carbon tax and carbon cap-and-trade will achieve the same level of increased efficiencyassuming that measurements of costs and benefits can be measured accurately by reducing emissions to the optimal level at minimum cost. The real difference in these policies is due to differences in the distribution of costs.In the carbon tax policy, the government receives added revenues while in the cap and cap-and-trade policies when permits are simply handed out to firms, the firm has no additional outlays early(a)(a) than the cost of abatement to stay within the cap or to barter for additional allotment from other firms. If the permits are initially auctioned off by the government, the additional revenues to the government should be nearly the same as with a tax scheme if marginal social costs and benefits have been measured accurately. However, the economics-based policies are preferable to policies based on fiat where specific technologies (e.g., smoke-stack scrubbers) or a uniform cap on emission outputs across all firms since these other pol icies fail to take into account social costs and benefits. With regard to the economics-based policies, the following added impacts may in like manner occur.First, in addition to static efficiencyefficiency occurring within a single period of time in that respect may also be dynamic efficiency within these policy schemes whereby firms have an incentive to adopt new technology over time to reduce their marginal costs of reducing carbon emissions (Econ. 101 Carbon Tax vs. Cap and Trade, n. pag.). Secondly, carbon emission taxes and/or auctioning permits will show additional government revenue that might be used to outset motley distortionary taxes on labour and/or capital (Econ. 101 Carbon Tax vs. Cap and Trade, n. pag.).Evidence and AnalysisThere are various problems chapd with the design of emissions tax regimes warranting discussion. First, if such a tax were placed on individuals rather than firms without any offsetting changes in other taxes or government transfers, a carbon tax might be regressive suggesting that the highest tax burden would be placed on the poor (Poterba, 1991, 11). This is mostly applicable to bungle pedal taxes where a flat emissions tax would make up a higher percentage of the income of poorer over wealthier taxpayers thus, an issue of equity arises here. Likewise, firms with higher profit margins would shoulder joint less burden from the tax than firms with lower profit margins given a similar costs of pollution abatement. Poterba (1991) suggests that this regressiveness could be offset by changes in either the direct tax system or in government transfers.Second, as the population grows and production totals continue to increase to meet the demands of this growth population, emission taxes will need to rise to keep emissions at a particular level this may lead to a set of distortions in terms of domestic vs. foreign production whereby firms can transfer production to other jurisdictions that do not have such taxes in place. T hus, worldwide trade leads to an opportunity to get around the tax scheme and the higher the taxes instituted, the higher the incentive to engage in such behaviour.Thus, if emission taxes differ significantly between two neighbouring jurisdictionfor example, the State of New York and computerized axial tomography or even New York and one of its neighbouring Canadian provincesthere is an congenital incentive to move production outside of the jurisdiction with the highest taxes and import products from elsewhere. Third, a central issue regarding the design of carbon emissions taxes to harmonize such polities with other fiscal instruments designed to mitigate the effects of climate change. For instance, it is important to fit that taxes on chlorofluorocarbons and emissions from fossil fuels are comparable to avoid distortions in inlet that may lead to a worse outcome for the environment than in the absence of such policies (Poterba, 1991, 27).Bosquet (2000) conducted a review of t he evidence regarding the impact of carbon emissions taxes on the environment and the economy. She claims that environmental taxes involve the shifting of tax burden from barter, income, and investment to resource depletion and waste. She asks the general question of whether such tax domesticise can produce a double benefit by share the environment and the economy simultaneously.Based on her reviews of the literature and available evidence, she concludes that when emissions taxes are instituted, they are generally associated with reductions in payroll taxes, andif wage-price ination is preventedthey often result in signicant reductions in pollution and small gains in employment (Bosquet, 2000, 19). Also associated with the implementation of such environmental taxes are also marginal changesgains or losses in production in the short to intermediate term, while investments decease marginally and prices increase. However, she cautions that the results of such environmental taxes in the semipermanent are less certain (Bosquet, 2000, 29).With regard to cap and cap-and-trade policies, the evidence is also available regarding the impellingness and consequences of such policies. Stavins (2008) describes a graduated cap-and-trade scheme that involves initially just Carbon gasses with 50% of permits issued to polluters in the market free of hinge on and other half auctioned off. Over 25 years, the percentage auctioned off annually will gradually increase to 100% and other greenhouse gas emissions will be included over this time span. The idea is to implement a gradual iterative policy with a slow escape of emission reductions. As time goes on, other emissions are included in this scheme and the system provides for harmonizing this scheme over time with effective cap-and-trade systems and other emission credit reduction programs in other jurisdictions. This harmonization efficaciously addresses the issue raised with emission tax policies that are unilaterally f ound in one jurisdiction without consideration for the policies in neighbouring jurisdictions.If there is an effective way to dovetail policies in different jurisdiction, then this would level the playing field between domestic and imported products. Regarding actual cap-and-trade policies already in place, Colby (2000) analyzes a cap-and-trade policy for limiting Sulfur Dioxide emissions. The changes stemmed from the Clean walkover Act of 1990 which allowed for a nationwide cap-and-trade policy for industrial firms emitting sulfur dioxide into the atmosphere. Marginal costs of reducing emissions fell substantially duringn the 1990s due to reduced costs of installing scrubbers, reduced costs of flue gas desulfurization, and falling costs for low sulfur coal all due, to a large extent, to an active program of trading/buying margins between firms that emerged after a few years of experience after the program was initiated.As Colby (2000) states, The allowance trading market enhanc ed competition among the different methods that firms use to control emissions, adding impetus to cost reductions (Colby, 2000, 642). Low allowance prices and falling marginal costs associated with reducing emissions produced earlier-than-predicted cutbacks in sulfur dioxide emissions. Allowance prices rose from lows of $80-90/unit in 1996 to about $215/unit in mid-1999 spurring further conservation efforts.Colby (2002) does intimate that design and implementation of cap-and-trade schemes involves some important policy tradeoffs equity among the players, rapprochement use levels with resource conditions, facilitating transactions between firms wishing to trade allowances, accurate accounting for externality costs, assuring adequate monitoring of emissions levels, and documenting welfare gains due to the policy. She says that efficient trading mechanisms can be more easily apply when there is a strong political or legal assign to cap resource use and trading allowances are genius d by all parties involved to be a way to ease allowance to limits on emissions (Colby, 2000, 638).In choosing between the various policies, it is inevitably important to sense the level of uncertainty over measuring the items of interest. With regard to emissions taxes, it is important to have fairly accurate estimates of marginal social costs and benefits and with regard to cap-and-trade schemes, there needs to also be a fairly accurate heart and soul of estimating the optimal level of emissions given all the costs and benefits involved in reducing emissions.If it becomes difficult to measure these items accurately, then the expected deadweight loss and associate probabilities of various miscalculations needs to be assessed and compared across the different strategies to determine the policy that produces the smallest expected deadweight loss which is key from an economic perspective. Since policies based on fiat, such as technology mandates and non-economically based output stan dards, are not set with regard to these types of measures, it is likely that the deadweight economic loss associated with these policies will be greater than for either emissions taxes or better yet, cap-and-trade policies.ConclusionThe evidence suggests that economics-based emissions policies are preferred over policies based on fiat. Moreover, the strongest evidence for promoting investment in pollution control equipment and reducing emissions that mitigate the effects of climate change bug out to involve cap-and-trade policies. Partially, this might be due to the flexible design of such policies whichthrough the auctioning and/or trading of allowancesaccount for changing market conditions. This policy, even more so than emission taxes, forces the industry to face current market conditions through the use of auctions and trading for emission allowances. As a result, the parties are forced to make choices based on strong economic criteria to obtain efficiencies over time.Works cit edBosquet B. 2000. Environmental Tax Reform Does It Work? ASurvey of The Empirical Evidence. Ecological Economics. 34, 19-32,Colby G. 2000. Cap-and-Trade Policy Challenges A Tale of deuce-ace Markets. Land Economics, 76, 638-658.Econ. 101 Carbon Tax vs. Cap-and-Trade. 2012. Website.Retrieved on June 5th, 2012 from http//www.env-econ.net/carbon_tax_vs_capandtrade.htmlMelvin W. Boyes M. 2011. Microeconomics. 9th ed. Marion, OH South-Western, Cengage Learning,Poterba JM. 1991. Tax Policy to Combat Global Warming On Designing a Carbon Tax. NBER Working Paper. MIT-CEPR 91-003WP. Retrieved on June 7th, 2012 from http//dspace.mit.edu/bitstream/handle/1721.1/50159/28596145.pdf?sequStavins RN. 2008. Addressing Climate Change with a broad U.S. Cap-and-Trade System. Nota Di Lavoro 67.2008 Fondazione Eni Enrico Mattei. Retrieved on June 7th, 2012 from http//www.feem.it/userfiles/attach/Publication/NDL2008/NDL2008-067.pdf