Question

Suppose we all agree that the emission of carbon into the atmosphere is a policy problem
.Further, assume we know that the private marginal cost of a ton of Co2 is $17
while the true social marginal cost of a ton of carbon is $32. Clearly layout a policy of
carbon taxes that would result in the socially optimal level of carbon emissions.
Demonstrate your argument graphically and carefully explain. Evaluate the relative costs
and benefits of carbon taxes relative to emission targets/restrictions. How would your
analysis change if you believed innovation in carbon saving technologies was going to
improve in the near future?

Answer 1

Emissions trading, or cap and trade, is a market-based approach to controlling pollution by providing economic incentives for achieving reductions in the emissions of pollutants.[1] In contrast to command-and-control environmental regulations such as best available technology (BAT) standards and government subsidies, cap and trade (CAT) programs are a type of flexible environmental regulation[2] that allows organizations to decide how best to meet policy targets. Various countries, states and groups of companies have adopted such trading systems, notably for mitigating climate change.[3]

A central authority (usually a governmentalbody) allocates or sells a limited number of permits to discharge specific quantities of a specific pollutant per time period.[4] Polluters are required to hold permits in amount equal to their emissions. Polluters that want to increase their emissions must buy permits from others willing to sell them.[1][5][6][7][8]Financial derivatives of permits can also be traded on secondary markets.[9]

In theory, polluters who can reduce emissions most cheaply will do so, achieving the emission reduction at the lowest cost to society.[10] Cap and trade is meant to provide the private sector with the flexibility required to reduce emissions while stimulating technological innovation and economic growth.[11]

A carbon tax is a tax levied on the carboncontent of fuels.[1] It is a form of carbon pricing. Revenue obtained via the tax is however not always used to compensate the carbon emissions on which the tax is levied (see implementation). Carbon is present in every hydrocarbon fuel (coal, petroleum, and natural gas) and converted to carbon dioxide(CO
2) and other products when combusted. In contrast, non-combustion energy sources—wind, sunlight, geothermal, hydropower, and nuclear—do not convert hydrocarbons to CO
2. CO
2 is a heat-trapping "greenhouse" gas[2]which represents a negative externality on the climate system (see scientific opinion on global warming).[2][3][4] Since greenhouse gas emissions caused by the combustion of fossil fuels are closely related to the carbon content of the respective fuels, a tax on these emissions can be levied by taxing the carbon content of fossil fuels at any point in the product cycle of the fuel.[5]

Carbon tax offers social and economic benefits.[6] It is a tax that increases revenue without significantly altering the economy while simultaneously promoting objectives of climate change policy.[7] The objective of a carbon tax is to reduce the harmful and unfavorable levels of carbon dioxide emissions, thereby decelerating climate change and its negative effects on the environment and human health.[8]

Carbon taxes offer a potentially cost-effectivemeans of reducing greenhouse gas emissions.[9] From an economic perspective, carbon taxes are a type of Pigovian tax.[10]They help to address the problem of emitters of greenhouse gases not facing the full social cost of their actions. Carbon taxes can be a regressive tax, in that they may directly or indirectly affect low-income groups disproportionately. The regressive impact of carbon taxes could be addressed by using tax revenues to favour low-income groups.[11]

A number of countries have implemented carbon taxes or energy taxes that are related to carbon content.[12] Most environmentally related taxes with implications for greenhouse gas emissions in OECD countries are levied on energy products and motor vehicles, rather than on CO
2 emissions directly.[9]

Opposition to increased environmental regulation such as carbon taxes often centers on concerns that firms might relocate and/or people might lose their jobs.[12] It has been argued, however, that carbon taxes are more efficient than direct regulation and may even lead to higher employment (see footnotes).[12]Many large users of carbon resources in electricity generation, such as the United States, Russia, and China, have resisted carbon taxation.[13][14] In some cases, countries such as China, have resisted after questioning which countries have the most responsibility.[15] In 2018, efforts by French president Emmanuel Macron to implement a carbon tax, led to mass protests by citizens, which forced the government to againsuspend the tax