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\r\nRead a full report about the full effects of this cap and trade program.<\/a><\/p>\r\nLet's examine this program, and compare it to a program in the EU that was less successful. Assume there are only two firms in the market and\u00a0 Firm 1 and Firm 2 face abatement curves as shown below:\r\n\r\n Read more about the failure of the EU Emissions Trading Scheme.<\/a><\/p>\r\n Assume Firm 1 and Firm 2 face abatement curves as shown below:<\/span><\/p>\r\n The world’s first large scale application of cap and trade to control pollution was approved by the Bush administration in November 1990. Since then, it has been hailed by many as a landmark event in environmental regulation. Introduced under the Clean Air Act Amendments of 1990, the policy was launched\u00a0to combat the growing threat of acid rain. It has been estimated that using this policy rather than command and control regulations saved the economy $1 billion a year. A new report from Harvard Environmental Economics Program concludes that the program was\u00a0a great <\/span>success <\/span>by almost all measures. \u00a0The legislation\u00a0 capped emissions\u00a0at 8.95 million tons annually, allowing power plants to slash SO2 in the most efficient way.<\/span><\/p>\n At the beginning of the program, the government allocated allowances, denominated in tons of SO2 emissions, to power plants covered by the law, according to formulas contained in the legislation. If annual emissions at a regulated facility exceeded the allowances allocated to that facility, the facility owner could either buy allowances or reduce emissions, whether by installing pollution controls, changing the mix of fuels used to operate the facility, or by scaling back operations. If emissions at a regulated facility were reduced below its allowance allocation, the facility owner could sell the extra allowances or bank them for future use. These opportunities created incentives to find ways to reduce emissions at the lowest cost.<\/span><\/p>\n![\"\"](\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2017\/03\/Screen-Shot-2017-03-25-at-9.48.52-AM.png\")
\r\n\r\n1. How much will the firms pollute before policy intervention?<\/strong>\r\n\r\n2. If the government implemented a cap and trade system, distributing a total of 12 million permits, with 6 million to each firm, who would sell and who would buy permits?<\/strong>\r\n\r\n3. How much would the seller be willing to accept, and how much will the buyer be willing to pay?<\/strong>\r\n\r\n4. What is the equilibrium price of permits, and the equilibrium quantity of Sulpher Dioxide production?\u00a0After the exchange of permits on the open market, how much does each firm emit?<\/strong>\r\n\r\n5. What are the total benefits and total costs to each firm from trading permits? Show that the trade was a Pareto Improvement.<\/strong>\r\n\r\nInstead of cap and trade, a common policy is for the government to set a carbon tax. As a reminder, a\u00a0<\/span>carbon tax imposes a tax on each unit of emissions and gives firms an incentive to reduce pollution whenever doing so would cost less than paying the tax. As such, the quantity of pollution reduced depends on the chosen level of the tax.<\/span>\r\n\r\n6. What is the\u00a0correct tax level to receive the same result as in question 2?<\/strong>\r\n\r\n7. How much revenue will the government raise from the tax?<\/strong>\r\n\r\n8. What assumptions does the government have to make under cap and trade? What about under the carbon tax?<\/strong>\r\n\r\nThe SO2 allowance-trading program was highly effective. SO2 emissions from electric power plants decreased 36 percent (from 15.9 million to 10.2 million tons) between 1990 and 2004.\u00a0The program\u2019s long-term goal of reducing annual nationwide emissions to 8.95 million tons was achieved in 2007.<\/span>\r\n\r\nNot all cap and trade programs have been effective. The EU Emissions Trading System for example has been largely unsuccessful. The cap was set at\u00a016 billion tonnes, or roughly half the European Union\u2019s total carbon emissions. Unfortunately\u00a0the government overestimated the demand for carbon, and to make things worse\u00a0a recession reduced industrial demand.\u00a0<\/span>\r\n\r\n![\"\"](\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2017\/03\/qrcode.40177180.png\")
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\r\n\r\n9. If the government implemented a cap and trade system, distributing a total of 16 million permits, h<\/strong>ow much will emissions be reduced by as a result of this policy?<\/strong>\r\n\r\nOnce the cap and trade program was implemented, it was hard to adjust it. The EU later attempted to take 900m tonnes of carbon allowances off the market and reintroduce them when it was hoped demand would be stronger, but the attempt failed to pass through European parliament.\u00a0<\/span>\r\n\r\nAnother way to correct the program would be for the government to buy the permits off the firms themselves.\r\n\r\n10. If the government wanted to reduce emissions by 50% by purchasing permits, what is the minimum amount they would have to pay?\u00a0<\/strong>\r\n\r\nAs you can see, while it may seen a cap and trade program would be easy to readjust if quantity assumptions are wrong, in reality implementing a policy and communicating it to the firms can be quite difficult.\r\n\r\nIn this case study we have shown how microeconomic concepts of abatement\u00a0and carbon-tax\u00a0can be used to understand past policy strategies. Do you have a example\u00a0you think would make a good case study? Contact economics103@uvic.ca to propose your story.<\/span>","rendered":"![\"\"](\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2017\/03\/5410822714_98f82a2db4_z.jpg\")
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