Question: Assess the benefits of using a carbon trading emissions scheme to address the problem of global warming.
Carbon trading is a system devised to limit the carbon emissions of polluters by allocating them permits to emit a certain amount of carbon dioxide. The government must first set the socially optimum level of pollution and divided this over a number of permits. Permits are then allocated to polluters to let them pollute a certain amount (which sums to the socially optimum level). Polluters can buy or sell permits amongst themselves if they want to pollute more or less.
A carbon trading scheme could be imposed on firms in one country, or it could be used by different countries in a global scheme.
One benefit of a carbon trading scheme is that the permits sum up to the socially optimum level of pollution. If this scheme is being used amongst countries, rather than firms, that would mean global carbon emissions is at the socially optimum level and the effects of global warming would be mitigated.
Another benefit is that polluters are rewarded for cutting pollution as they can sell unused permits. Conversely, polluters are penalised for polluting too much as they must buy extra permits. This should incentivise polluters to become more efficient and develop green technology to reduce their carbon emissions even further to profit off their permits.
Moreover, with a carbon trading scheme, the government can gradually reduce the level of carbon emissions that each polluter is allowed to permit, reducing our impact on global warming even further in the future.
However, there is no guarantee that a carbon trading scheme will work as planned. Firstly, it may be too difficult for the government to monitor and enforce the permits. For instance, the administration costs and equipment costs to monitor emissions may be too dear. It may also be too difficult to distinguish exactly which firm or country is polluting. Additionally, polluters may be able to invest in technology that will help them hide their emissions from the government.
More importantly, how should the government allocate permits? Should they use an auction? Or maybe divide the permits into equal amounts? Maybe they could use grandfathering (allocating permits in proportion to past pollution)? Whichever method they choose will be unfair to some firms. Furthermore, how would permits be allocated amongst different countries? Permits could be allocated by GDP per capita but this would be unfair because large counties with a low GDP will relieve smaller quotas.
In addition, if all major industrial countries don’t agree to join a carbon trading scheme then it is likely that none of them will. This is because those countries that do agree to join may pull out if they are afraid that producers in their own economy will move to economies in which there are no permits.
Lastly, countries may join a carbon trading scheme but leave in the future. Countries may be concerned that carbon emission permits are stopping their economy from growing. For instance, although it is not a trading scheme, the Paris Agreement suffered a major blow when the USA eventually pulled out of it.