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Table of Contents

  1. Topic pack - Microeconomics - introduction
  2. 1.1 Competitive Markets: Demand and Supply
  3. 1.1 Competitive Markets: Demand and Supply - notes
  4. 1.1 Competitive markets - questions
  5. 1.1 Competitive markets - simulations and activities
  6. 1.2 Elasticities
  7. 1.2 Elasticities - notes
  8. Section 1.2 Elasticities - questions
  9. Section 1.2 Elasticities - simulations and activities
  10. 1.3 Government intervention
  11. 1.3 Government Intervention - notes
  12. 1.3 Government intervention - questions
  13. 1.3 Government intervention - simulations and activities
  14. 1.4 Market failure
  15. 1.4 Market failure - notes
    1. The meaning of externalities
    2. Types of externalities
    3. How do externalities affect allocative efficiency?
    4. Negative externalities of production
    5. Negative externalities of consumption
    6. The economic theory of traffic congestion
    7. Demerit goods
    8. Government responses - demerit goods
    9. Possible government responses to externalities
    10. Direct government provision
    11. Extension of property rights
    12. Taxes and subsidies
    13. Tradeable pollution rights
    14. Regulation, legislation and direct controls
    15. Positive externalities of production
    16. Positive externalities of consumption
    17. Merit goods
    18. Why might merit goods be underprovided by the market?
    19. Government responses - merit goods
    20. Public goods
    21. Common access resources & sustainability
    22. The tragedy of the Commons
    23. Common access resources in practice
    24. Sustainability
    25. Threats to Sustainability
    26. The threat to sustainability from the use of fossil fuels
    27. The threat to sustainability from poverty
    28. Government responses to threats to sustainability
    29. Cap and Trade Schemes
    30. Promoting Clean Technologies
    31. The 'dirty side' of cleaner technologies
    32. International responses to threats to sustainability
    33. Asymmetric information
    34. Abuse of monopoly power
    35. Inequality
  16. Section 1.4 Market failure - questions
  17. Section 1.4 Market failure - simulations and activities
  18. 1.5 Theory of the firm
  19. 1.5 Theory of the firm - notes (HL only)
  20. Section 1.5 Theory of the firm - questions
  21. Section 1.5 Theory of the firm - simulations and activities
  22. Print View

Cap and Trade Schemes

Syllabus: Evaluate, using diagrams, possible government responses to threats to sustainability, including legislation, carbon taxes, cap and trade schemes, and funding for clean technologies.

Explanation: A cap (upper limit) and trade scheme is a market-based approach to reducing carbon emissions through financial incentives. Corporations or national governments are permitted to trade emission allowances under an overall cap, or limit, on those emissions. Fines are imposed for producers exceeding those limits, while producers operating below their carbon limits can sell or "trade" their spare allowance to companies that are operating above the limits.

Cap and trade schemes set specific limits on GHG emissions for countries and organisations. They promote the trading of emissions allowances between emitters, who can meet the cap efficiently and those who face more of a challenge in reducing emissions.

The choice between environmental taxation and cap and trade schemes to address climate change has generated considerable discussion with impassioned arguments on both sides.

Taxation has the advantage that it can be implemented by individual governments without international agreement, but, environmental taxes have dead-weight losses in addition to their beneficial effects in addressing externalities. It is also argued that establishing a price for GHGs through cap and trade schemes has the advantage of providing some certainty about reductions in quantities of emissions and creates a market to achieve the climate change mitigation target at the lowest cost.

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The following article outlines the advantages and disadvantages of cap and trade schemes compared to environmental taxes as a means of reducing emissions.

Cap and trade schemes vs. Carbon tax

You can read the article Cap and trade vs. Carbon tax in the window below, or you can follow the link to read the article in a separate window.

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Carbon pricing has a double climate effect - it's a huge source for revenue, but also gives the right incentives for reducing emissions by making it expensive to pollute.

Norwegian Prime Minister Jens Stoltenberg