The Impact Of Emission Trading

Refer to the above table. Suppose the government commands each firm to reduce its emissions by 1 ton each and allows these two firms to trade pollution permits. If a 1-ton credit is sold for $175, the total cost for both companies combined to reduce emissions by a total of 2 tons could be as low as:

An added twist on the cap policy allows firms to trade emission allotments between themselves based on the buyer of allotment bargaining with the seller over the proper price to pay for the extra allotment. A two-panel diagram is needed to better understand the logic of trading emission allotments. Figure 4 illustrates the marginal cost of reducing emissions of two firms. One firm is run on older technology with high abatement costs that goes from right to left with zero costs represented at the lower right-hand corner of the diagram. The other firm has newer technology in its plant with lower abatement costs that goes left to right with zero costs represented at the lower left-hand corner of the diagram. The width of the horizontal axis is the reduction in emissions that must be achieved overall to an efficient level.

The trade, on the other hand, builds a ready market for carbon permits helping industries and companies and factories to innovate so that they can meet their allocated emission limit. The more these factories emit the more they pay and vice-versa. This therefore acts as an incentive for the companies to pollute less.

A cap-and-trade program sets a maximum level of pollution, and distributes emission permits among firms that produce emissions (Carbon Tax, 2013). The purpose of which is regulation of specific emissions by stationary and mobile sources, and setting a specific level which all emitters are re-quired to meet. Cap-and-trade possibly has less of a direct economic component to it than the other alternatives to reducing emissions described due to the ability to trade permits versus the expendi-ture of resources improving technology, with some arguing it is to the detriment of the environment. As stated in the article found in Reclaiming the Environmental Agenda, by Ashford, N. et al., 2008, “being a market-based instrument, ‘the cap-and-trade option suggests that at least this form of MBI may be more environmentally effective than the usual command-and-control alternatives, in addition to being more economically efficient.” (Ashford, N. and Caldart, C., 2008, p. 908).

Its adoption in 1997 and ratification in 2002 furthered the fight against anthropogenic interference with earth’s climate system. Canada’s commitment began with a goal to reduce GHGs by 6% reduction from 1990 levels by 2012, or 461 megatons (Canada and the Kyoto Protocol 2016). In order to achieve these goals, legal requirements expected policies and measures prepared by the participating countries to reduce GHGs, by utilizing all available mechanisms, including joint implementation to earn emissions reduction units (ERU) to be counted towards the target, the clean development mechanism and emissions trading (Kyoto Protocol 1997). Every year, on the date set forth, every participating country was expected to keep track of emissions limits and performance standards, develop spending or fiscal measures, as well their expectation for the next year and results from the previous (E. Canada 2013). When the first reduction timeline was up in 2008, instead of a decrease in emissions, Canada recorded an increase 24.1 percent higher than 1990 levels. The lack of commitment was superseded by the new government’s ‘Made in Canada” effort to push country-unified laws, though no significant changes were

The cap on the market is set on carbon emissions, creating scarcity within the market. At the end of each year businesses within the scheme are required to ensure they have enough allowances to account for their installation’s actual emissions. Those firms that do not comply and pollute without sufficient permits are hit with heavy fines. (Euro 100 per ton). The aim of carbon trading is to create a market in pollution permits and put a price on carbon. In this way, policy can help internalise external costs of firms’ production and encourage lower emissions to tackle climate change. In a cap and trade system, the volume permits would gradually decline and total emissions, in theory, will diminish. The model of such can be shown as

But based on the previous analysis, for Canada, the method that can impact carbon dioxide emissions the most is the carbon tax system. A proper carbon tax will deter fossil fuels and encourage clean energy (Carbon Tax or Cap-and-Trade?, 2014). The carbon tax will provide a predictable price for carbon dioxide emissions for Canadians. As well, with the carbon tax system, there is more motivation to adhere to regulations because it will become a standard. The revenue generated from the taxation will also assist Canadians by ultimately facilitating greener practices by subsidization and funding environmentally conscious research. Finally, the practicality of reducing emissions under a carbon taxation system is much more functional than the cap-and-trade program. The carbon tax system has been cited to both grow the economy while reducing emissions. That is why a carbon tax system is a superior approach to the experimental cap-and-trade program for reducing emissions and growing the economy (Brander,

Cap-and-trade is a program which uses a market-based mechanism to control greenhouse gas emissions, the primary driver of global warming. The “cap” sets a limit on emissions, which is lowered over time to reduce the amount of pollutants released into the atmosphere. It limits emissions in electric power generation, natural gas, transportation, and large manufacturers. The “trade” creates a market for carbon allowances, leading to more cost-effective pollution cuts, and incentive to invest in cleaner technology. The less they emit, the less they pay, so it is in their economic incentive to pollute less. Each allowance (typically equivalent to one metric ton of carbon dioxide) are auctioned or allocated to regulated emitters on a regular basis.

The government sets an industry-wide limit to carbon production. Corporations that produce more than the set carbon limit are able to buy allowances from corporations who produce below the allowed amount. This creates a market for carbon so that companies can actually make money by reducing their carbon output. As time progresses, the government will incrementally lower the cap, which will reduce the number of allowances issued and increase their price. Ontario's Climate Change Mitigation and Low-carbon Economy Act, 2016 (the "Climate Act"), creates a cap-and-trade system that covers 82 percent of Ontario's direct emissions. This system covers all fossil fuels (e.g., gasoline, diesel and natural gas) used in Ontario by individuals,

It is said that (Revelle 2009) ‘A cap-and-trade system emissions by limiting the quantity of a pollutant (carbon dioxide [CO2]) that can be emitted and then allocating a corresponding number of tradable emissions permits to sources covered by the program’. The total allowed emissions are separated into individual permits which are allocated to the sources covered by the program; each presents the right to emit a certain quantity of the pollutant. At the end of the year, the emissions of each regulated source must be reported to be retired from the system. It is also mentioned that

Government enacted solutions are probably the most effective ways to reduce carbon emissions and to control pollution since unfortunately the majority of individuals mainly act to their own self-interest and are not concerned with the future of the planet. This is a prime example of the tragedy of the commons, which is the exploitation of a common resource. In this case the common resource is the atmosphere. The first method proposed is the carbon cap trade system. The term cap means the limit or the maximum of the amount of pollutant to be emitted. A trade refers to the transfer of permits that have to be bought by firms that need to increase their volume of emissions from firms that require fewer permits 1. The carbon tax method is a tax on the carbon content of fuels — effectively a tax on the carbon dioxide emissions from burning fossil fuels 2. So, which system would be best for the government to enact to reduce carbon emissions in the atmosphere?

“The cap”: Each large-scale emitter, or company, will have a limit on the amount of greenhouse gas that it can emit. “The trade”: It will be relatively cheaper or easier for some companies to reduce their emissions below their required limit than others. These more efficient companies, who emit less than their allowance, can sell their extra permits to companies that are not able to make reductions as easily.

Though the term 'cap-and-trade ' is mostly referred to efforts in reducing carbon emission, the initial idea of trading emissions was applied to SO2 emission control. During Regan administration from 1980 to 1988, 70 bills were written to address SO2 emission and acid rain control. However, such 'command-and-control ' policy was too costly to operate. It was not until 1989 the government proposed emission trading as a means of reducing SO2 emissions2. Cap-and-trade officially became part of Clean Air Act 19903. The result from this very first cap-and-trade initiative was very encouraging-3 million tons of acid rain emissions have been cut. With the recognition of climate change, cap-and-trade was proposed to be a solution to dealing with carbon emission.

Therefore, cap-and-trade, a market-based mechanism, allowed a process for business to buy and sell the right to pollute (Lawrence & Weber, 2017) as the EPA, with the Clean Air Act of 1990, placed a national cap on emissions of sulfur and nitrogen oxides (Allen & Yago, 2011). Ultimately, the cap-and-trade system created incentives to explore ways to reduce sulfur dioxide emission by taking advantage of low-cost abatement options. Subsequently, if annual emissions exceeded the allowances allocated to that facility, the CEO may purchase allowances from another company or reduce emissions by installing pollution controls through the cap-and-trade program (Schmalensee & Stavins,

Pollution, specifically global warming, is of growing concern to people and governments. It is a controversial issue whose validity is still being debated by scientists. The Kyoto Protocol is an international attempt to address global warming through emissions controls. Traditional neoclassical economic models do not incorporate pollution in rudimentary theories of supply, demand, or pricing, as a result, firms do not consider pollution as a cost of production, which leaves government regulation as the primary method for controlling these externalities. The goal of emissions trading is to allow one business, which can make greenhouse gas emission reductions for a relatively low cost, to sell