Lecture 15 | Environmental Economics | Cap & Trade

Cap & Trade Case Study

What did classifying CO2 as a pollutant allow?

regulation under clean air act

What are the 3 main ideas on how to regulate CO2 emissions?

tpc, toll road, permit, and cap & trade

Toll Road Model

tax on emitters, the more you emit, the more you pay

What are 3 benefits of the Toll Road Model?

encourage lower emissions, government revenue, easy to determine how much you owe

What are 4 downsides of the Toll Road Model?

consumers pay more, measuring emissions honestly is difficult, new taxes are not politically popular, encourages company movement overseas

Permit Model

permissible limit, regulatory emissions limits

What are 2 benefits of the Permit Model?

regulatory framework exists b/c its already used, limits can be tweaked to reduce co2 in the future

What are 4 downsides of the Permit Model?

enforcement is lax/difficult, lawyers mire things in court forever, tracing sources needs expensive monitoring, encourages company movement overseas

Cap & Trade Model

capitalistic, sets permissible limit, allows selling pollution credits if under

Under the Cap & Trade Model, you can _____ credits when you’re under the permissible limit and _____ credits when you’re over

sell, buy

What are 5 benefits of the Cap & Trade Model?

market driven, carrot & stick to encourage innovation, business make money, no motivation to move overseas, has worked in the past

What is the Carrot & Stick Analogy?

carrot = encourage good behaviors, stick = discourage bad behaviors

What is the Carrot & Stick of the Cap & Trade Model?

carrot = sell credits when under, stick = lose money from fines or buying credits

What has the Cap & Trade Model successfully reduced?

sox, acid rain

What are 4 downsides to the Cap & Trade Model?

costs passed to consumers, needs bureaucracy to monitor, strict enforcement, businesses can game system

Why should we regulate CO2 now despite the high costs?

cost of switching increases the longer we wait