Cap and Trade Policy Paper Essay

debutThe going of degree centigrade firing offs is an important integrity not only from an environmental status but also an sparing mavin. while littleen b pitiable electric discharges is an important cardinal for the health of human beings as rise up as that of the environment, the larger interview is what role of form _or_ system of presidential term strategy is best for twain trim much(prenominal) runs which tycoon shake off an clashing on efforts to subside the effectuate of befoulment on climate change. magical spell ther argon options to consider which does not entrust on economicals technological or create standards extend tod by command and curb regulationsthey argon often fraught with form _or_ system of disposal-making resistance by patience because they do not every(prenominal)ow industry to diagnose any choices or play a role in solving the occupation of excessive emanations and the outcome that these sparks place on some some otherwises. Instead of such(prenominal)(prenominal)(prenominal)(prenominal) draconian measures establish on fiat, the preferred options rely on economic tools instead to provide inducings to industry to police itself by any incenting enthronization in spark- step-down and/or energy pitch technologies or to curb business in transmission channel with the agree/ well-disposed- personify rather than further the private/ producer- be of production. Two such economic policies to consider in this move atomic number 18 dismission task incomees and poll-and- dispense policies. everywhereview of constitution Problem coke emissions reductionConsider a phoner that faces an increasing b atomic number 18(a) befoulment reprieve personify curve as in the phone number 1. Left unregulated it un hale get hold of not to flash back its coulomb paper emissions (a.k.a let up down speed of light emissions) and avert approach the follow of foramen correspond by the fl ying written report underneath the b be(a) temporary removal cost curve stand for by stadium (B + C + D) in the plot below. habitus 1 peripheral cost and Marginal Benefits of Reducing ascorbic acid Emissions pic seminal fluid Econ ci cytosine impose vs. crest-and-Trade, 2012, n.pag. sound off that constitution analysts pee finalised that the economically streamlined take aim of pollution rest occurs at the pose in cadence where b entrapline utilitys of hiatus equal the b ar(a) cost cost of intermission as is suggested in economic theory. The imparting take of deoxycytidine monophosphate emissions is e* (reduction in emissions is mensurable from the far unspoiled field in the diagram above to the pointe*). The question is what insurance form _or_ system of government to follow to arrive at e* every both(prenominal) type of fiat policy involving either some type of take restriction or requiring use of a particular pollution-control engine room o r some type of policy that contains financial inducings to reduce emissions. This paper hypothesizes that policy options involving economic incentives be preferable to those options that involve regulatory fiat.stipulation of Economic Policy Models1) A speed of light paper Emissions valuateOne policy instrument that slew be used to achieve this direct of recess is to caboodle a task where marginal benefit equals marginal cost represented by the plain appraise line in the Figure 2 below. Under such a system of rules, the polluter provideing find that it is cheaper to reduce carbon emissions so long as the marginal cost is trim than the tax. Since the tax bill (A + B) is great than the marginal abatement cost bill (B) to the left of the point e*, the inviolable will choose to reduce emissions up to the level of C with the remaining emissions level indicated in see to it 2 metric from the right in the diagram. To the right of e*, the marginal abatement cost, repr esented by areas C + D, are greater than the tax bill (area D) so the house will choose to concede the tax and strain to emit pollutants beyond e*. Figure 2 The carbon paper Emissions measurepicSource Econ hundred and one vitamin C revenue enhancement vs. Cap-and-Trade, 2012, n.pag. So long as the marginal be and benefits of abatement shag be known with certainty, an emissions tax laughingstock be set at the point of intersection of these deuce measures resulting in an competent level of pollution emissions at e* with total abatement be (including taxes paid) to the polluter of area B+D and providing the g all everywherenment with revenues 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 measurable in their entireness or when in that location is uncertainty intimately the figures obtained that leads to added questions as to whether this would be the best policy to follow.2) A Cap PolicyAn pick 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 cordial benefit equals marginal cordial cost of step-down emissions/abatement represented by the vertical cap line in Figure 3 below. The polluting pie-eyed must reduce its carbon emissions to e* where the marginal amicable cost of reducing emissions equals the marginal social benefit of the products produced by the polluter. such a policyif the social costs and social benefits can be measured entirelyresults in an competent level of emissions produced/reduced at e* with an abatement cost borne byFigure 3 Cap Policy for for each one FirmpicSource Econ 101 Carbon Tax vs. Cap-and-Trade, 2012, n.pag. the polluter equivalent to area B (Econ. 101 Carbon Tax vs. Cap and Trade, n. pag.). The issue is whether total social costs can be measured and measured accurately in order to set such a policy at the correct or competent level of emissions for each sloshed. Normally such policies do not result in competency even though an efficient level of general emissions can be attained since it does not account for several(predicate) costs of abatement in incompatible firms. That is, a level of emissions can be attained that is equivalent to that achieved under an economically efficient policy but the level is not achieved at the lowest general cost.One way of obtaining individual caps is for the brass to auction off emission permits that total the pre-set amount of emissions that it feels is best. Firms with high costs of reducing emissions will bid higher than firms with pull down cost coordinates. Again, the only problem is look out 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 wiliness emission allotments between themselves base on the vendee of allotment bargaining with the seller over the proper price to knuckle under for the extra allotment. A 2-panel diagram is needed to give out understand the logic of work emission allotments. Figure 4 illustrates the marginal cost of reducing emissions of two firms. One firm is run on older engineering science with high abatement costs that goes from right to left with zero costs represented at the lower right-hand receding of the diagram. The other firm has newer technology in its plant with lower abatement costs that goes left to right with zero costs represented at the lower leftfield corner of the diagram. The width of the plane axis of rotation 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 efficacy 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 abatem ent must be the corresponding crosswise all firms in the mart. 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 than emissions than the high cost (or reducing emissions) firm. Such a policy can be implemented by issuing carbon permits to contrastive firms and allowing them to buy and sell their permits in the open market. Normally, equal amounts of permits are issued to each firm since it is difficult to assess the original 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 establishment being able to determine the optimal level of total emissions desired reflecting social costs and benefits of reducing carbon emissions. feature the divers(prenominal) economic policy options together, it is unmistakable that it is possible to achieve the equivalent level of reduction in emissions by prospect 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, the 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 salary 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 assumption that it is difficult, if not impossible, to individualized caps based on different cost structures of abatement, an efficient offspring is difficult to achieve under such a policy even though emissions are reduced to the same overall level. Regarding the market failure collect to the damaging 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 lower limit cost. The real difference in these policies is repayable 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 hand out to firms, the firm has no superfluous outlays other than the cost of abatement to die hard within the cap or to buy extra 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 take a crap 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 policies fail to take into account social costs and benefits. With demand to the economics-based policies, the following added impacts whitethorn also occur.First, in addition to soundless efficiencyefficiency occurring within a single period of mthither may also be changing efficiency within these policy schemes whereby firms deliver an incentive to adopt new technology over time to reduce their marginal costs of reducing carbon emissions (Econ. 101 Carbon Tax vs. Cap and T rade, n. pag.). Secondly, carbon emission taxes and/or auctioning permits will father additional government revenue that might be used to offset several(a) distortionary taxes on labour and/or nifty (Econ. 101 Carbon Tax vs. Cap and Trade, n. pag.).Evidence and AnalysisThere are variant problems associated with the determination 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 gasoline 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 value margins would shoulder less burden from the tax than firms with lower profit margins given a similar costs of pollution abatem ent. 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 growing population, emission taxes will need to rise to animation emissions at a particular level this may lead to a set of distortions in terms of domestic vs. immaterial production whereby firms can transfer production to other jurisdictions that do not have such taxes in place. Thus, international 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 tomography or even New York and one of its neighbouring Canadian provincesthere is an inherent incentive to move production outside of the jurisdiction with the hig hest taxes and import products from elsewhere. Third, a central issue go throughing the design of carbon emissions taxes to harmonize such polities with other fiscal instruments designed to mitigate the do of climate change. For instance, it is important to check out that taxes on chlorofluorocarbons and emissions from fossil fuels are like to avoid distortions in consumption that may lead to a worse resolution for the environment than in the absence of such policies (Poterba, 1991, 27).Bosquet (2000) conducted a review of the evidence takeing the impact of carbon emissions taxes on the environment and the parsimoniousness. She claims that environmental taxes involve the shifting of tax burden from employment, income, and investment to imaging depletion and waste. She asks the general question of whether such tax reform can produce a double benefit by helping the environment and the economy simultaneously.Based on her reviews of the literature and operable evidence, she con cludes 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). as well as associated with the implementation of such environmental taxes are also marginal changesgains or losings in production in the brief to medium term, while investments decease marginally and prices increase. However, she cautions that the results of such environmental taxes in the long-term are less certain (Bosquet, 2000, 29).With regard to cap and cap-and-trade policies, the evidence is also uncommitted regarding the soundness and consequences of such policies. Stavins (2008) describes a gradatory cap-and-trade scheme that involves initially just Carbon gasses with 50% of permits issued to polluters in the market leave office of charge and other half auctioned off. Over 25 years, the percentage auctioned off annua lly will slowly increase to vitamin C% and other greenhouse gas emissions will be included over this time span. The idea is to implement a gradual iterative policy with a slow trajectory 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 effectively addresses the issue raise with emission tax policies that are one-sidedly established 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 existent 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 invigorated Air Act of 1990 which allowed for a nationwide cap-and-trade policy for industrial firms emitting siemens dioxide into the atmosphere. Marginal costs of reducing emissions fell considerably 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 calling/buying allowances between firms that emerged afterward a few years of experience after the program was initiated.As Colby (2000) states, The allowance trading market enhanced 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 prodding further conservation efforts.Colby (2002) does mention that design and implementation of cap-and-trade schemes involves some important policy tradeoffs equity among the players, balancing use levels with option conditions, facilitating transactions between firms wishing to trade allowances, accurate accounting for externality costs, ensure adequate monitoring of emissions levels, and documenting welfare gains due to the policy. She says that efficient trading mechanisms can be more easily implemented when there is a dependable political or legal mandate to cap resource use and trading allowances are sense by all parties involved to be a way to ease registration 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 postulate to also be a fairly accurate government agency 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 expect 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 attain from an economic perspective. Since policies based on fiat, such as technology mandates and non-economically based output standards, 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 appear to involve cap-and-trade policies. Partially, this might be due to the plastic 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. whole kit and caboodle citedBosquet B. 2000. Environmental Tax Reform Does It go away? ASurvey of The Empirical Evidence. bionomic Economics. 34, 19-32,Colby G. 2000. Cap-and-Trade Policy Challenges A Tale of tercet 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. Microec onomics. 9th ed. Marion, OH South-Western, Cengage Learning,Poterba JM. 1991. Tax Policy to scrap Global Warming On calculating 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 aComprehensive U.S. Cap-and-Trade System. Nota Di Lavoro 67.2008 Fondazione Eni Enrico Mattei. 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