Question

Which are the most effective policy tools for dealing with pollution? Which are the more practical politically? Why?”

Answer 1

Tax and marketable permits are the two most prominent policy tools for dealing with pollution.

A carbon tax is a carbon pricing mechanism where the carbon content of fossil fuel is taxed especially in the transport and production units. Many countries have imposed carbon tax like Denmark, Ireland, India, and the UK. Sweden has a carbon tax of EUR110 and India has a carbon tax of Rs 400 per tonne, on the production and import of coal. Developing countries find carbon tax more practical politically and economically. Carbon tax increases the cost of production for firms hence reduces the output produced and also forces firms and consumers to look for cleaner greener technology or renewable energy. Tax forms a huge source of revenue for the developing countries and revenue from a carbon tax can reduce its reliance on income tax hence reducing the IT rate. The fall in income tax will increase purchasing power and will also incentivize people to work hence inducing an increase in aggregate demand. Although carbon tax has its pro it has cons too as it doesn't help to limit or reach the emission targets like the emission trading scheme(ETS). The marketable permits or ETS are widely used in developed countries as they have reached their stage of growth and development, hence can now focus on the reduction of pollution. The government determines the optimal level of pollution based on which marketable permits are auctioned and this permit gives the right to pollute to the fixed level. This has been gaining popularity as it not only forms a source of government revenue but unlike the former, it fixes the level of pollution to a certain level hence reduction of pollution is more effective. As the permits are marketable, transferable, storable, limited in number it provides an incentive to firms to look for greener technology as can make revenue by selling the permit to other firms.