Pollution Tax and Permits to Pollute

Firms in the pursuit of self- interest (to maximize profits) cause pollution that imposes costs on other members of the society that are not fully reflected in market prices. Thus, the free market equilibrium emission of greenhouse gases will be more than the socially optimal level. Explain what is meant by locative efficiency. Highlight any similarity and/or difference between the two policies: Both are policies that seek to reduce the level of emissions to the socially optimal level of pollution.

Pollution taxes is a market based approach to limiting pollution emissions but permits to pollute is a combination of command and control ND marketed approaches to the task of limiting pollution emissions. While pollution taxes seek to reduce pollution by distorting prices, pollution permits seek to reduce it through quantity limits. Governments or governing body sets standards on the maximum amount of pollution/permits to be given out free of charge). After which firms are allowed to trade these permits on the market for treatable permits.

Explain how the pollution tax works to achieve locative efficiency/evaluation/advantages: Taxation policy allows the government to charge an amount of tax preferably similar to the value of MACE at the socially optimal level of production (the Poisoning tax). Poisoning tax is levied on producers who pollute the environment to encourage them to reduce pollution. In this case, the tax causes the producers to internalize the external cost of production such that the socially optimal level of production and hence, emission is achieved.

In addition, the tax revenue collected by the government may be used to counteract the negative effects of the pollution. In the long run, firms have the incentive to adopt cleaner methods of production so that they can pay less pollution taxes. Possible evaluation/ imitations of the pollution tax system & application to the context: A key problem with Poisoning tax is that of imperfect information, in other words, calculating what level of tax will counterbalance the negative externalities. Another problem lies in the use of the tax revenue – whether it is used to clean up the environment or pocketed by corrupted officials.

In addition, political factors such as lobbying of government by polluters may also tend to reduce the level of the tax levied, which will tend to reduce the effectiveness of the tax. Explain how the “permits to pollute” system works to achieve locative efficiency/evaluation/advantages: The “permits to pollute” system is an application of Cease Theorem. This system of permits allows the government to set the overall level of pollution (emission of greenhouse gases) that it finds desirable. The government then decides on who has the right to pollute the air and in what quantity.

Firms are, however, free to trade permits with each other. Firms that are already producing cleanly and do not need the permits can sell the permits to those firms who find it more difficult to meet the standards. In this way, market forces are allowed to determine he distribution of pollution without the need for the authorities to micro- manage. Firms whose emissions exceed the amount of credits they possess will be heavily penalized. Over time, the government can gradually reduce the number (volume) of pollution permits available so that total pollution emissions can be controlled.

The main advantage of permits to pollute system is that it helps to Overcome the information problem faced by pollution taxes. Information problem is overcome via the market for treatable permits. The idea behind carbon trading is that firms that can reduce their missions at a low cost will do so and then sell their credits to firms that are unable to easily reduce emissions. A shortage of credits will drive up the price of credits and make it more profitable for firms to engage in carbon reduction. In this way the desired carbon reductions are met at the lowest cost possible to society.

Information is captured via the price mechanism. In other words, the system relies on market forces to determine the allocation of treatable permits. This approach is more efficient than relying on the government to determine the distribution and/or price of permits. In addition, this system provides added incentive for firms to seek ways to reduce their pollution, for example, through increased technology, as firms who pollute less than the carbon permits that they are given can sell these permits and hence, profit through trading permits.

In other words, the ability to sell permits is an incentive for firms to invest in pollution abatement The system makes allowance for industrial development. New polluters are able to purchase unwanted permits from established firms. Both new and old firms are encouraged to AC Eire efficient pollution control capabilities. Possible evaluation/limitations of the “permits to pollute” system & application to the context: How are permitted levels of pollution decided?

If based on current production levels they may be no advantage for firms that have already taken steps to control their pollution emissions. If too many permits are given out, then the system will not be effective in reducing the level of emissions. Traded permits may see pollution being concentrated in certain geographical areas. At the Kyoto Summit, developing countries were not required to make reductions in pollution -? but could be given credits for certified reductions” in pollution that could be then traded with other countries.

This might allow countries such as the United States to buy up pollution permits from Id’s (including many form high polluting countries in Eastern Europe) – and avoid the need to reduce pollution themselves. The system requires stringent checks. Firms that violate the system and pollute more than what their permits allow, must be heavily penalized. The cost of violation must be greater than the benefits from violating the system. Hence, there are likely to be high administrative costs associated with monitoring elution emissions – particularly if the number of firms involved is very large.

Possible synthesis: Pollution rights markets are not generally more efficient than Poisoning taxes but are often more appealing to policy makers because giving out the rights for free (or at less than market price) allows polluters to lose less profits or even gain profits (by selling their rights) relative to the unaltered market case. Markets for emissions trading have been Set up to bring better locative efficiency and improved information sharing to the pollution externalities problem. Marks 1-3 4-6 3 7-8

Remarks Did not identify or was unable to identify the objective that the two policies were targeting. Inaccurate or irrelevant economic analysis of the 2 policies to tackle the problem. Generic or theoretical answer -? regurgitation from textbook without trying to apply information from case study at all: Max mm. State objective of policies with definitions but explain one policy only with clarity and application (evaluation not a must); little awareness of the difference between the two policies: Max mm.

State objective of policies with definitions and explain both policies clearly with application (evaluation not a gust): Max mm Well-reasoned and clear understanding of the policies and issues involved, with good knowledge of facts and theory applied to the context. Show new insight. In other words: Provided the economic rationale; the main difference between the two policies; explain how each policy works separately and evaluate each separately; good data application skills; attempted a synthesis.

Good structure and linkages between ideas. Caution: Note that the government does not sell the permits to the firms. They are issued free of charge by the government to the firms. Other notes adapted from tutor u): If property rights exist for producers and other owners of factors of production, these rights can be bought and sold to reflect the value of externalities effects created. Polluters are given or can bid for a permit that allows them to create a fixed amount of pollution.

These permits can be resold: If you can sell a permit for more than it is worth to you you do so; If you can buy a permit for less than it is worth to you you do so Businesses can either buy permits or invest in technology to reduce pollution emissions – whichever approach saves them money. Gradually the total amount of pollution allowed can be reduced – as the stringency of pollution limits is tightened, so the value of permits may rise, they will be more valuable to companies that can bring down pollution levels at lowest marginal cost.

Marketable permits have been tried in several countries -? including Singapore where an auction mechanism has been introduced for the trading of ozone-depleting substances. For the system to be effective there needs to be common acceptance of the legal framework for the trading of permits and regulation of the amount of pollution produced. The Kyoto Summit on Climate Change (held in December 1 997) witnessed a decisive move towards a greater use of internationally traded pollution permits -? based on the idea that each country is required to achieve a specific percentage reduction in pollutants such as CO. 2. Examine the likely factors that affect the price Of treatable “permits to pollute”. Essentially, the “permits to pollute” system works through market forces, thus the prices are dependent on market demand and supply for the treatable permits. Explain what determines the equilibrium price obtainable permits: The equilibrium price of treatable permits is determined by the market emend and supply for treatable permits. Examine the current trend in the price of treatable permits and the factors contributing to it: According to the articles, prices in the initial period were hovering around Euros 10-15 per tone.

This was mostly due to high supply and low demand for permits, as the transaction volume was low. On the supply side, Russia was given an overgenerous allowance of credits to induce it to join the treaty. On the demand side, the regulatory boards in EX. were pretty loose on the controls. In fact, the industries exerted political pressure on the ELI governments and successfully lobbied EX. governments to cut some slack, so as not to reduce its competitiveness, especially against non-participants of the Kyoto Treaty. This led to low demand for such permits.

However in 2005, carbon prices soared, going up as high as Euros 29. This was mostly due to demand factors. While the supply of permits remained pretty stagnant due to the quota on emissions, the demand for permits continued to rise. In Rupee’s case, as oil and gas prices continued to escalate, coal was the next best substitute for fuel. However coal produced twice as much carbon dioxide as oil and gas. Thus firms were forced to buy carbon allowances in the market. As long as the price of the permits remains well below the value of the fines, firms would find it worthwhile to buy permits than to continue to pollute.

Other demand factors that affect the price of treatable permits include industrialization. As the global economy continues to expand, the demand for permits will increase since increased production tends to be accompanied by increased pollution and hence firms will require more and more permits to pollute. In addition, expectation of future increases in price of permits will cause the emend for permits to increase and in turn, the price of permits to rise rapidly. However, in the longer run, there are factors that will affect the price of treatable permits.

On the demand side, the stringency of the measurement and monitoring systems will also affect the prices of the permits. The more stringent the measurement and monitoring systems are, the greater the demand for permits and hence, the higher the price of the permits. Factors like the invention of better, cleaner technologies however can dampen the increase in the demand for permits, thus dampening the increase in the price of permits. This is especially so if it is cheaper to produce cleanly than to purchase permits.

On the supply side, the supply of permits is likely to remain pretty constant or be reduced over time, which Will cause price of treatable permits to increase over time. Possible synthesis: Hence, how the price of treatable permits changes depends not on a single factor but on a combination of factors and the interaction between demand and supply side factors. As environmental concerns become an increasingly important issue, it is likely that the demand for permits will increase and coteries Paramus, the price of treatable permits will rise.

The extent of increase in demand for treatable permits and hence, the rise in the price obtainable permits will however be dampened by the presence of better and cleaner technologies. Levels 1 234 Marks 184-5 6-7 9-10 Remarks Mostly irrelevant answer, with listing of points from articles, with little or no reference to case materials. Identification Of factors from case material, but lacking in demand-supply theoretical framework. One sided explanation of demand factors only or supply side factors only.

Sound analysis of both demand and supply factors within a clear demand-us apply theoretical framework. Good use of case material. Precise and logical explanation. Critical assessment of the factors that affect prices, with good application to the context. Trend. 3. With the help of the data provided, critically comment on the necessity and impact of the Kyoto Treaty. [12] Candidates are expected to give a judgment upon analysis, on the necessity of the treaty, and to assess the effectiveness and impact of the Kyoto Treaty, based on the information given.

Candidates should make reference to the articles to comment on the necessity and impact of the Kyoto treaty. Case Evidence must not be listed. Case Evidence must be explained. It would be useful to have some background knowledge of the Kyoto Protocol. It is an international treaty on climate change. Countries that ratify this protocol commit to reduce their emissions of carbon dioxide and five other greenhouse gases, or engage in emissions trading if they maintain or increase emissions of these gases.

The treaty was negotiated in Kyoto, Japan in December 1997, opened for signature on March 16, 1998, and closed on March 15, 1999. The agreement came into force on February 16, 2005 following ratification by Russia on November 18, 2004. As of February 2006, a total of 161 countries have ratified the agreement. Notable exceptions include the United States and Australia. Other countries, like India and China, which have ratified the protocol, are not required to reduce carbon emissions under the present agreement.

Thesis: The Kyoto Treaty is necessary because the treaty helps to achieve the objective of reducing emission: Some believed that the “emissions-trading scheme as a way forward” as global warming is becoming an eminent problem. It forces countries to assume responsibilities, and the developing countries can benefit from the “joint-implementation” scheme through global economic co- operation. From extract 4, there is also evidence that the Europe carbon trading market is steadily growing, hinting that there is some success of the Kyoto Treaty.

Anti-thesis: However, it may not be necessary because: On the other hand, the Kyoto Treaty may not be entirely necessary because more and more firms are assuming corporate social responsibility. In the case of US, though the government rejected the treaty, the country had shown remarkable reduction in emissions of carbon dioxide from 1974 to 1998. Some firms like DuPont are making voluntary cuts by up to 65% from asses level. America also had a sulfur-reduction program among a limited number of players, which is much more feasible compared to the Kyoto Treaty at the global platform.

The Kyoto Treaty may also not be necessary because there are also other available alternatives like taxation policies and legislation and regulation (though these policies have their limitations). The Kyoto Treaty may not be necessary because the emissions of greenhouse gases by Australia, which did not ratify the agreement, remained pretty constant over a period of 24 years. Limited inferences can be made from the charts as the information as only dated till the year 1998. However, as of 2005, Australia was the world’s largest emitter per capita of greenhouse gases.

Thesis: The Kyoto Treaty has a positive impact on reducing emissions in certain countries (If candidate is tackling the issue from the micro perspective, then the candidate should focus on the impact on the consumers (in terms of price consumers pay, quantity bought, total expenditure, consumer surplus), the producers (in terms of price producers receive and keep, quantity sold, total revenue and producer surplus), the government (in terms of tax revenue or burden of u basis) and the society (in terms Of efficiency and equity goals); if candidate is tackling the issue from the macro perspective, then the candidate should focus on the four macro goals of economic growth, unemployment, inflation and balance of payments): (Candidates are expected to assess the usefulness of the charts to judge the success of the protocol. ) According to charts 1 and 2, it seems that there was some progress since The Kyoto Protocol was adopted in 1997. Particularly, the carbon dioxide emission by the manufacturing sector has dropped by 1 0%, although emissions by service and travel sector have gone up. From chart 2, countries which ratified the protocol have reduced emissions by a significant amount indicating an improvement in locative efficiency society welfare improves. Anti-thesis: However, it may also have the following undesirable or unintended impact in the following areas: The Kyoto Treaty may have a negative impact on certain economies.

For instance, the treaty will limit the expansion of certain economies, like in the case of Japan which is recovering from recession. The firm which pollutes more than what the permits allowed will have to buy extra permits from other firms. Paying for the treatable permits will add on to he firm’s cost of production supply or marginal cost curve of the firm shifts upwards each firm’s production will fall (likewise profits will fall). If majority of the firms in the country has to purchase the treatable permits which will add to their cost of production the economy production will fall economic growth in terms of actual growth will slow down. Inflation will also rise.

Many firms also see the treaty as a highly inequitable and inefficient agreement as it gives firms in the non-participating countries the upper hand in competitiveness since the latter are able to use cheaper methods that cause elution. Inequity is a normative issue as it is based on the concept of “fairness”. Synthesis: Make a stand based on your above arguments for and against the treaty in terms of necessity and impact Numerous current economic analysis indicates that Kyoto protocol is most costly than potential alternative policies, but others argued that they are considerably more economically efficient methods of emissions reduction and they set the political precedent for bigger and more effective cuts in the future.

Leave a Reply

Your email address will not be published. Required fields are marked *