Question

Australia’s bushfires in 2019 reignite its debate about climate change. In this assignment, you will discuss the public policies on greenhouse gas emissions, an important contributing factor to climate change.

1. Many observers believe that the levels of greenhouse gas emissions in our economy are too high.

a. If society wants to reduce overall emission by a certain amount, why is it efficient to have different amounts of reduction at different firms?

b. Economics usually prefer corrective taxes over regulations as a way to deal with greenhouse gas emissions. Can you explain why? (Hint: Can regulations target the firms that should undertake bigger reductions?)

c. Suppose there is a sharp development in the technology for controlling greenhouse gas emissions. Using a diagram for the market for emissions, illustrate the effect of this development on the demand for emissions rights. What is the effect of a carbon tax on the price and quantity of emissions? Explain.

d. The demand for emission rights depends on the time horizon. In the short term, the demand for emission rights is likely inelastic because firms may not have many alternatives. Over time, however, demand becomes more elastic because more alternatives are developed. Illustrate the effects of an increase in carbon tax on emissions in the short run and in the long run. Explain

Answer 1

a) It is efficient to have different amounts of pollution reduction at different firms because the costs of reducing pollution differ across firms. If they were all made to reduce pollution by the same amount, the costs would be low at some firms and prohibitive at others, imposing a greater burden overall.

b) Corrective taxes are levied on per unit basis, it could be dollars per ton of pollution, so those who can reduce pollution at a lower cost than taxes would reduce pollution and don't pay taxes. Those firms who can't reduce pollution at lower cost than the tax will pay taxes and pollute the environment. It effectively puts a price over rights of pollution.
Tradable pollution permits are efficient because those forms who can reduce pollution at lower cost will do that and trade those rights to the firms who can't reduce at lower cost. They would do this trade for a price they mutually agree to. In this way both the firms are better off and leads to socially efficient outcomes.

C) The cap on greenhouse gas emissions that drive global warming is a firm limit on pollution. The cap gets stricter over time.

The trade part is a market for companies to buy and sell allowances that let them emit only a certain amount, as supply and demand set the price. Trading gives companies a strong incentive to save money by cutting emissions in the most cost-effective ways.

D) A carbon tax’s effect on the economy depends on how lawmakers would use revenues generated by the tax. The tax would help reduce U.S. emissions but would have only a modest effect on the Earth’s climate without a worldwide effort.

Lawmakers could increase federal revenues and encourage reductions in emissions of carbon dioxide (CO2) by establishing a carbon tax, which would either tax those emissions directly or tax fuels that release CO2 when they burned. Emissions of CO2 and other greenhouse gases accumulate in the atmosphere and contribute to climate change—a long-term and potentially very costly global problem.