Question

Briefly explain the salient features and purpose of the European Union's Emmission Trading System and why economists generally support such systems as opposed to command and control/direct regulation systems?

Answer 1

EU Emission Trading System:

Objective: reduce emissions of green house gas and control climate change

Salient features:

1. It develops a market for pollution rights and consider pollution (emissions) as a commodity that can be traded in market.

2. It is so far world's largest emission /carbon trading market. It covers EU,Iceland, Liechtenstein and Norway .

3. The model is called cap and trade system. Here installations have a maximum permitted level of emissions (cap). Each installation is allocated emissions allowance with in the cap which they can trade.

4. If any company emit more than cap , it can buy emissions allowance to cover for extra emissions.

5. If any company emits less than cap , it can keep extra allowances for next year's or trade them in market.

6. At the end of year , all the installation have to meet emissions restrictions, either by reducing emissions , keeping emissions below the cap or they can buy allowances from others to cover the extra emissions. Failing to do so attracts penalty.

7. Cap is revised and lowered subsequently to reduce over all emissions .

8. This is a incentive driven model for reducing emission. It's in best interest of the polluter to reduce emissions. Over times instalation will try to develop green technology to avoid penalty.

Why economists prefer this :

Command and control:

In this approach regulator specifies the steps individual polluters must take to solve pollution problem.

1. The authority may dictate the level of pollution that is deemed acceptable .

2. It may make it mandatory to use particular technology to curb emissions

3.it will punish for non compliance.

Why incentive driven model is preferred:

1. Information requirement is less significant because it is not necessary to know what is going inside the factory, which technology they r using.

2. it will create incentive for polluter to invest in cheaper ways of controlling pollution

3. Incentive method involves polluter to pay for control cost as well as damage . Thus there is no implicit subsidy to industry

4. It provides and effecient and cost effective way for controlling climate change.