Question

Discuss how to implement a cap and trade program for carbon emissions in electricity. Who should get the permits and who would benefit in that situation?

Answer 1

Cap and trade program limits emission and also puts a price on it . It is one of the best policies formulated for environmental protection which is also very economical . The cap is the limit set on emissions on total that can be allowed , which is set based on scientific standards . Now the trade part is the marketable nature of the permits , which allows companies to buy and sell pollution permits as per requirement . This helps to maintain the total emission at a certain level fixed , also provides incentive to companies to pollute lesser and save money on permits .

In electricity , the production is done by power plants which generate a lot of pollution . A cap can be set on the emission level and permits generated among those power plants . These permits are traded as per market demand and supply for permits . Also consumption of electricity can be restricted by this cap and trade method . Firstly , a cap is set on total consumption of electricity . Now by trading the permits to consume electricity people can alter their consumption level , but the overall total consumption remains same in the economy .

The permits are given to power plants manufacturing electricity . The benefits of this system is reaped by every entity since there is a positive externality from controlling pollution . Firms getting the permits are benefitted .