Question

Compare and contrast 2 examples of permit trading programs that have been used for air quality. How do these programs differ in terms of the target pollutant(s), the design of the program, and the relative success?

Answer 1

Let us compare and contrast between the following two most popular permit trading programs namely carbon credits trading and the pollution tax, used to restrict the amount of emissions.

Carbon credits and trading or emissions trading is a process of providing economic incentives for better air quality by reducing the amount of pollutants emitted and it is a market based approach.Under this a government body distributes limited number of permits that allows the emission of certain specific pollutants for a given time period.The firms that causes more pollution by emitting more pollutants has to buy permits from other firms who are willing to sell them. These permits can be traded in the secondary market too.

it facilitates the firms to search for the best possible strategies to minimise the amount of emissions that they can minimise the cost of pollutions.

Where the pollution tax is a surcharge for the amount of pollution created while producing a commodity or service.It increases the unit price of a commodity and therefore restricts demand. Lesser the pollution, the unit tax tend to be less and the commodity will attract more demand .Both these methods are overlapping, because the firm that pollutes less will have more credits to trade and the product of the firm will bear a lower tax rate.

The major point of difference is that the tax is a price regulation method that it directly affects the price of the commodity where the carbon credits regulates quantity for the limit on emissions permitted. So the only debate persists is whether to control the price or the quantity.

Therefore the success rate for both the programs mentioned above is similar but provided the price elasticity of demand for the commodity is less sensitive, cap and trade would bring about a higher rate of impact.