Explain a tradeable-emission policies and their possible short comings. Support our answer with a graph.

Expert Solution

tradable emission policies is a market-based approach to control pollution. It has two key components: a limit (or cap) on pollution level and tradable allowances equal to the limit that enable factories to emit a specific quantity of the pollutant. The limit is necessary to ensure that the environmental goal set by government is met while the tradable allowances provide flexibility for companies to set their own compliance path. The tradable permit encourages the firm to innovate and reduce pollution emissions .

Before the emission tradeable policy, demand and supply curve intersect at point A in the diagrammed generate OQo amount of pollution . If now government introduces a cap and trade policy such that it limits the emission to OQ1 , the supply curve becomes vertical .And given the demand the price rises from OP1 to OP2 .

cons

Trading of allowances allows the high polluting company to continue to emit high level of emission in the environment without encouraging them to invest in cleaner technology . Also it is difficult to measure the emission level of firm and this process involves transactions costs in buying and selling of permits .

Rahul Sunny answered 2 years ago

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