Question

Why are tradable permit systems viewed as preferable to standards and taxes in reducing pollution emmision and pollution concentration levels?

Answer 1

The standards and taxes are set by assessing the cost or damage associated with each unit of pollution and the costs associated with controlling that pollution. However appropriate the tax level right is key: if these are too low then the firms and households are likely to opt for paying the tax and these will continue to pollute, over and above what is optimal for society. Similarly if these are set too high and the costs will increase higher than required to reduce emissions, impacting on profits, employment and end consumers. Moreover with tax there is an immediate cost for businesses to pay on every unit of greenhouse gas produced, thus a more initial damage to the balance sheet.

On contrary the aim of tradable permit systems is to provide market incentives for firms to reduce pollution emission, pollution concentration levels and the external costs associated with it. It sets a maximum level of pollution, a cap, and distributes pollution emission among firms that produce pollution. It gives certainty about the quantity of emissions (it cannot be more than the cap), thus are viewed as preferable to standards and taxes in decreasing the pollution emission and pollution concentration levels