Carbon-Tax and a Cap-and-Trade Strategy

1282 words 6 pages
Distinguish between a carbon-tax and a cap-and-trade strategy for reducing carbon dioxide and other so-called greenhouse gases (that are believed by many scientists to be causing global warming).
According to the case, the carbon-tax and a cap-and-trade system are the best economic tool to employ to reduce emissions. As we know, taxes are the most important expense for a company or firm, if they would emit much more carbon dioxide and other gases, they need to pay more taxes on using carbon recourses. It is stated (Bubna-Litic & Chalifour 2012) that ‘One of the defining features of carbon taxes is that they generate a relatively clear and predictable stream of revenue’. The revenue can be used in many different ways and a key issue is how
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The emission cap is tightened to achieve more successful pollution-reduction targets that required companies to adjust their strategies to comply with the new levels. As we know, the best example is Acid Rain Program under the cap-and-trade system. It is argued (Carlson 2012) that set a permanent cap on the total amount of sulfur dioxide (SO2) that could be emitted by electric power plants across the country. So the idea of setting cap-and-trade program to reduce the greenhouse gases emissions in order to reduce the air pollution.

3. Explain how supply and demand determine the price for pollution rights in this case.
Pollution right is a market that trades in a set of ‘rights’ (permits) to create units of the allowable level of pollution (Jayanthakumaran 2012, p.370). According to the case, the government of United States set a cap of 5 billion tonnes of CO2 emissions per year and the government sum to the limit set in the cap and distributes them to polluting firms. So the only way that the firm can emit a tonne of CO2 is if it owns a permit to do so. As the example of Smokestack Toys has pollution rights that is 100 tonnes of CO2 emissions and it would get $100000 profits. As a result, the toys company will sell the rights to a power plant which is more than the profits in order to they can gain lots of profits than they produce fixed toys by using the permit. Because the power plant has large


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