Question

Q: The Paris Climate Conference (COP21) in December 2015, 195 countries adopted the first ever universal, legally binding global climate deal. The agreement sets out a global action plan to put the world on track to avoid dangerous climate change by limiting global warming to well below 2 degrees Celsius. COP21 limits the amount of greenhouse gases emitted by human activity to the same levels that trees, soil and oceans can absorb naturally, beginning at some point between 2050 and 2100. Some countries are concerned about the costs of making such a cut in carbon emissions. Economists have measured that the cost of pollution control is between $15 - 20 per ton of carbon emitted. However, there is a great deal of uncertainty about what the costs might be; some say it will be easy to reduce carbon emissions, others say it will be very expensive. In one developed country, two proposals are being considered to achieve the reduction. Proposal A involves the issuance of permits for carbon emissions every year, with the number of permits equaling the targeted emission level proposed by the Paris Agreement (assume that the target is 8% less carbon emissions than in 2000). Each permit will be good for emitting one ton of carbon. Proposal B is the same as Proposal A except that the government agrees to sell an unlimited number of additional permits for $20 each.

a. Explain how each of these proposals work and what the price of permits might end up being under each proposal.

b. Discuss the pros and cons of each proposal.

Answer 1

The Paris Climate Conference has made a well planned agreement to reduce global emission levels. If the amount of greenhouse gases emitted are more than what the nature can absorb, it will result in increase in global temperature, called global warming. This increased temperature will cause the ice to melt, thus raising sea levels and causing danger to human and animal life. Both parts of answers are explained below:

Ans a.) In the developed country referred above, both proposals will issue permits to each industry.

                Under Proposal A, each permit will allow the industry to emitt one ton of carbon. For example, Sandy Inc. emitted 100 tons of carbon in the year 2000. As per the Paris Agreement, Sandy Inc will now be allowed to emitt only 92 tons of carbon (100- 0.08 *100=92). Hence, Sandy Inc will need 92 permits. Lets take the cost of each permit to be $17.5 (average of $15 and $20, as given in the question). So in total, Sandy Inc. will need to buy 92 permits for a total sum of $1,610 ( 92 * $ 17.5)

Now, lets analyse Proposal B for Sandy Inc.: Here, unlimited permits are issued. So, if Sandy Inc. continues to emitt 100 tons of carbon, then it will have to buy 8 more permits at $ 20 each, ie: for $160. Here, total cost of permit for Sandy Inc. will be $1,770 ( $ 1,610 + $ 160).

Ans b.) Pros of Proposal A are as follows:

             1) Since the industry is made to pay for each permit, companies emitting carbon will try to reduce their carbon emissions in order to reduce their overall costs.

             2) This proposal has high likelyhood of achieving the targetted emission level as per Paris Agreement

             3) This proposal also encourages more efficient level of production, which means that goods may be manufactured by emitting fewer carbon.

          Cons of Proposal A are as follows:

           1) Companies may want to reduce their production levels. The reason being, more production will result in more emissions, which will require the companies to buy more permits and hence, will result in overall costs. So, to reduce costs, companies will reduce production levels. This may lead to slowing down of the economy and cause unemployment.

            2) If companies wish to achieve more efficient levels of production so as to emmit less carbon, they will have to invest money in Research and Development to devise the efficient level of production. This may increase the overall costs significantly.

          Pros of Proposal B are as follows:

This proposal will allow the companies to continue with their current production levels, as they can purchase additional permits. Thus, we need not worry about slowing down of the economy and unemployment.

         Cons of Proposal B are as follows:

           1) The objective of the Paris Agreement will not be achieved, as the targetted emissions are 8 % less than in year 2000. Companies will buy more permits to increase their level of emissions, thus exceeding the targetted emission levels.

            2) Larger companies which can afford to buy more permits will be at an advantageous position compared to smaller companies. Hence, this porposal is discriminatory in nature.