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Economics
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What are the successes and failures of cap and trade?

How does cap and trade work?

Could cap and trade create lucrative green resources like carbon sinks?

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Joshua Stredder
Joshua StredderLv10
21 Apr 2021
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Related questions

Suppose two firms emit carbon dioxide. The marginal costs for each firm are given by MC1 = 14e1 and MC2 = 2e2, where e1 and e2 are emission reductions of firm 1 and firm 2, respectively. Firm 1 generates 300 units of pollution and firm 2 generates 200 units of pollution. Suppose a regulator issues 300 permits for the cap-and-trade scheme to firm 1. How many, if any, permits are traded between firms?

Does a real externality exist? Or is it just a peculiar externality? If a real external- ity exists, argue which of the government’s tools are best suited to address the issue: taxes/subsidies, cap-and-trade, or something else.

Let’s consider the following examples:

British Petroleum drills for oil in the gulf coast

Carbon emissions from vehicles

You get a college diploma

Buying a car with added safety features that prevent the drivers/passengers’ deaths in the event of an accident

Bringing crying babies on a plane

Free trade with China causes wage cuts among steel workers in the US

Competition harms existing firms by lowering price

Selective abortion benefits women as they become scarce

After a beautiful house burned down and became ugly, the housing prices went down in the neighbourhood

Discuss the following:

Climate change policy in Ontario

• New provincial government ends carbon pricing policy

• New plan to reduce emissions out for public consultation

• Min. of Environment ruled out carbon pricing (towards the end of article)

• Province believes it is not an effective way to change behavior:

“We are out talking to people about the approach we're going to take… That approach won't include a carbon price. But we do, for example, plan, as we said during the election, to have an emissions-reductions fund to fight climate change.”

“We are focusing on the polluters, in terms of people producing the most emissions, not on individual families and people.”

• Besides carbon pricing (either through tax or cap-and-trade), what other options does the province have?

• In light of the above quotes, how might these policies perform?

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