A Deeper Look at Tradeable Allowances
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This section provides an overview of tradable permits and their application in controlling pollution, specifically focusing on the Clean Air Act and its success in reducing SO₂ emissions. It also highlights the economic and political aspects of tradable allowances compared to Pigouvian taxes.
Tradable Permits and the Clean Air Act
- Tradable permits are a combination of costs and command and control methods used to reduce pollution.
- The Clean Air Act has been successful in reducing SO₂ emissions while allowing electricity generation to increase.
- The market has discovered low-cost ways of reducing pollution through the tradable allowance system.
- Firms generating electricity from clean sources can make money by selling allowances, while those using dirty sources have to buy allowances.
- Tradable allowances implicitly encourage clean energy and discourage dirty energy.
Participation in Tradable Allowance System
- Anyone can participate in these markets, not just electricity generators.
- Individuals or groups can purchase permits and choose to tear them up, effectively reducing pollution.
Comparing Tradable Allowances with Pigouvian Taxes
- Tradable allowances are similar economically to Pigouvian taxes if tax levels match external costs and the number of allowances is efficient.
- Politically, they differ in terms of who receives initial allowances.
- Pollution allowances could be auctioned off instead of given away for free, generating revenue for the government.
Political Acceptance of Pollution Control
- Giving firms initial pollution allowances increases acceptance among large energy firms compared to imposing taxes directly.
- Tradable allowance systems provide a more politically acceptable approach for firms as they are given some right to pollute at historical levels.
Application to Global Climate Change
- Tradable allowances have been successful in controlling sulfur dioxide emissions.
- Applying a similar system to combat global climate change and carbon emissions is theoretically possible.
- However, the international nature of the problem makes it more challenging to implement a global plan compared to national plans for sulfur dioxide control.
Importance of Economics in Solving Environmental Problems
- Understanding economics, including Pigouvian taxes and tradable allowances, is crucial for solving environmental problems effectively and at lower costs.
- Lowering the cost of pollution control increases the likelihood of achieving reductions in carbon emissions.
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