Cap and Trade Policy Paper

Introduction: The issue of carbon emissions is an important one not only from an environmental perspective but also an economic one. While reducing carbon emissions is an important one for the health of human beings as well as that of the environment, the larger question is what type of policy strategy is best for both reducing such emissions which might have an impact on efforts to mitigate the effects of pollution on climate change. While ther are options to consider which does not rely on economics-- technological or output standards achieved by command and control regulations--they are often fraught with political resistance by industry because they do not allow industry to make any choices or play a role in solving the problem of excessive emissions and the burden that these emissions place on others. Instead of such draconian measures based on fiat, the preferred options rely on economic tools instead to provide incentives to industry to police itself by either incenting investment in emission-reducing and/or energy saving technologies or to reduce production in line with the total/social-costs rather than just the private/ producer-costs of production. Two such economic policies to consider in this regard are emission taxes and cap-and-trade policies.

Overview of Policy Problem: Carbon emissions reduction Consider a company that faces an increasing marginal pollution abatement cost curve as in the Figure 1. Left unregulated it will choose not to reduce its carbon emissions (a.k.a abate carbon emissions) and avert facing the costs of abatement represented by the area underneath the marginal abatement cost curve represented by area (B + C + D) in the diagram below.
Figure 1: Marginal Costs and Marginal Benefits of Reducing Carbon Emissions [pic]
Source: Econ 101: Carbon Tax vs. Cap-and-Trade, 2012, n.pag. Suppose that policy analysts have determined that the economically efficient level of pollution abatement occurs at the