Question

Several generators pollute the environment by emitting carbon dioxide. Generators have different costs of reducing carbon emissions. The government wants to put a cap on total emissions. Putting a cap on each generator is more efficient compared to issuing tradeable emissions permits to each generator. Is this true or false?

Answer 1

False.

Issuing tradeable permits to each generator is more efficient than putting a cap on each generator. As the generators have different costs of reducing carbon emissions, now if they given the same cap on each generator, then some of the generators will have a higher cost of reducing emissions compared to others, thereby resulting in a higher overall costs. If tradeable permits are issued to each generator, then generators with lower costs of cutting down emissions can trade the permit to other generators that have a higher cost on reducing emissions for a profit. By doing this, it will allow the generator with higher costs to buy permit and experience less losses. On the other hand, the generators with lower cost of reducing emissions can sell its permits for a profit covering for the cost of reducing emissions. This will lower the total cost of all generators while the total emission remains the same as before.