Mar 02 2009
Obama’s carbon market: an introduction the market-based approaches to pollution reduction
Published by Jason Welker at 1:13 am under AP Economics,Competitive Markets, Demand and Supply,Efficiency,Energy,Environment,Externalities,Incentives,Market failure
Inside Obama’s Green Budget – Forbes.com
Some say that Global Warming may be the greatest market failure of all. This podcast was originally broadcast in January of 2007 while George Bush was still in office. The commentator claims that global warming is “nothing but one giant market failure”, arguing that the United States therefore must get serious about tackling the problem.
The allocation of resources towards carbon emitting industries has almost undoubtedly contributed to the warming of the planet over the last half century. Only recently have governments begun taking active measures to reduce the impact of industry on the environment through greater regulation of polluting industries, employing corrective taxes in some instances and market-based approaches to pollution reduction in others.
US President Barack Obama, unlike his predecessor, appears to be serious about correcting the “market failure” represented by global warming:
Obama’s budget, announced Thursday, looks to fund a host of new energy programs, from carbon sequestration to electric transmission upgrades. It would also provide the EPA with a $10.5 billion budget for 2010, a 34% increase over the likely 2009 budget. Nineteen million dollars of that would be used to upgrade greenhouse gas reporting measures.
The Interior Department would get $12 billion for 2010. The agency would use part of the money to asses the availability of alternative energy resources throughout the country.
Funding comes from elaborate carbon “cap and trade” program, which puts a price on emitting pollution and is the core of Obama’s plans. Starting in 2012, the government would sell permits giving businesses the right to emit pollution, generating $646 billion in revenue through 2019.
During those years, the number of available permits would gradually decline, forcing businesses to buy the increasingly scarce, and costly, rights to pollute on an open market. Obama hopes that the rising cost of permits will encourage businesses to invest in clean technologies as a cheaper alternative to meeting pollution mandates, helping to cut greenhouse gas production to 14% below 2005 levels by 2020.
Below is a diagram that illustrates precisely how the Obama cap and trade plan is meant to work. Notice that between 2012 and 2020 the cost to firms of emitting pollution will increase dramatically, while at the same time the total amount of carbon emissions in the US economy will fall due to regular reductions in the number of permits issued to industry.
The Obama cap and trade scheme is not the first experiment with such a market based approach to externality reduction:
Europe established such a market in 2005. But some E.U. governments allocated too many credits at the outset, causing the value of some permits to fall by half and making it relatively easy for large polluters to simply buy credits rather than cut emissions. Overall emissions grew in 2005 and 2006. In 2008, E.U. emissions dropped 3%; 40% of that drop was attributed to the carbon trading scheme.
Europe’s cap and trade program took a few years before it began having any noticeable impact on the emission of carbon by European industry. While unpopular among the firms who are forced to pay to pollute, the fall in emissions in Europe shows that a market for carbon may be effective in forcing firms “internalize” the costs of carbon emissions, which until now have been born by society and the environment in the form of the negative effects of global warming.
Discussion Questions:
- Why do you think tradeable pollution permits are more politically viable than a direct tax on firms’ carbon emissions?
- Why did Europe’s carbon emission permit market fail to reduce emissions over its first couple of years of implementation?
- Is making firms pay to pollute a good idea in the middle of a recession? Do you think that we should even be worrying about the environment when millions of people are losing their jobs and entire industries are struggling to survive?
About the author: Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course.
Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this authorRelated posts:
- Reducing negative externalities – the European market for carbon emissions
- Robert Reich on Obama’s “cap and trade” plan for the environment
- Market Failure and the role of government in the economy ~ an introduction to Environmental Economics
- An answer to Kevin Yeh’s excellent question about emissions monitoring…
- “Global warming is one GIANT market failure”
The tradeable pollution permits force businesses to find other ways to produce without using carbon. With this the use of carbon can be fully banned from those businesses. A direct tax on the carbon emission would only make the price for using it higher. But it still would be used and therefore would still cause "harm".
In Europe the carbon emission permit market fail because some governments allocated too many credits at the outset, which made the price of the permits fall and therefore it was easier and probably cheaper just to buy the credits instead of finding new ways to produce without emission.
It's is hard to say if it's a good idea, but I think it's always the right think to look for the environment. It's very important that we decrease emissions and stop global warming from happening as far as possible, because if we first try to stop the recession and then start acting against global warming it might be too late to actually be able to do something.
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Tradeable pollution permits make the pemrits into a market as well so that the price for them is according to supply and demand and there is an equilibrium price which makes sense to the market.
During the first few years the price of these were so low that the firms didint mind polluting at a slightly higher price.
Making firms pay to pollute during a recession is not a necessarily bad because people should always be taxed for hurting the environment. Also this brings in money for the government so spend accordingly on bail outs or other economic plans to stimulate the economy. However it may put a strain on some industries causing some less desirable results in this case the governemnt should cut the tax and possibly subsidise just until they are considered stable.
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Tradeable pollution permits are more efficient than taxes on emission as they are tied to market concepts such as demand and supply. If supply of those permits starts declining, firms will have to pay higher prices which will eventually explode the firm's costs so that it will rather invest in new technology than keep buying new permits. Taxes, on the other hand, are only based on the amount of emission and do not hurt the firms as much as diminishing pollution permits. It is definitely a good idea to make firms pay for polluting the environment, because they try to externalize their costs at the expense of society. In the middle of an economic recession, it might seem unreasonable to make the firms pay for pollution, however we have to recall that we only have one earth and that we have to act now in order to alleviate the impact of global climate destablization. The firms will definitely benefit in the long run as they are forced to invest in new technologies which will then make them competitive for the future.
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I agree that tradeable pollution permits are more efficient and suitable to decline carbon emissions. A tax forces firms to reduce their costs of production but not necessarily reduce their carbon emissions, in fact they might seek to externalize their costs even more and still continue to emit as much carbon through their production. The permits force them to seek other methods that will only benefit them in the future as the use of renewable energy becomes a major concern and reduces their dependency on oil. Also, most of the tax burden can be placed on the consumer and have little effect on the producers (depending on the elasticity of the product.)
It is hard to decide on whether to focus primarily on the environment or on the millions of unemployed. However ignoring what some people say to be the "greatest market failure of all" is also not beneficial for our economy. Both aspects need to be considered equally in order for our economy to move forward, and like Christian said, in the long run we can only benefit by tackling the imperative issue of global warming (or climate "destabilization" as some people insist on calling it). In fact why not kill two birds with one stone and have the government fund the research of alternative and renewable energies. It wouldn't eliminate unemployment but it would create job opportunities.
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Forcing firms to pay extra considering the extreme conditions they are already in due to the recession is quite harsh. Also, taking into consideration that the recession is already benefiting the environment in many ways by forcing companies to cut back on production:
-the reduction of producing inelastic goods(luxuries like phones and iPods which contain many damaging chemicals)
-less waste dumped on landfills
-less SUV's sold since people are buying cars that consume less
It is hard to determine whether putting these measures Obama has created for America into action is in everyone's best interest. On one hand it will only increase the anxiety of firms struggling to stay in the market and yet isn't the protection of the environment in the benefit of everyone in the country? Or more importantly everyone in the world? An area that can help minimize the firm's struggles and even help America come out of this recession is the creation of more green jobs which is already part of Obama's "green recovery" plans. Non-ecofriendly firms, such as those that depend on foreign oil, will be forced out of the market while greener ones where the government is providing well paid jobs will be more successful.
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I agree that the permit system could work in most industries, I believe that the government should allow certain companies to get around the system. For example pharmaceutical companies. If they are providing medicines or vaccines and they are made using methods that pollute. If there is no way for the company to produce the drug without polluting then either that drug is going to rise in price or come off the market, neither of which are good for society.
Also, large companies that are on the verge of failure should be exempt from these for a certain amount of time. Because of a large company were to go out of business then that could leave thousands unemployed. Again, not good for society or the economy.
Some good examples of these are GM, Ford and Chrysler. If any of these companies fail it would cause huge numbers of people to lose their jobs, not only from one of those companies but from the supporting industries as well.
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Europe's carbon emission permit market failed to reduce emissions over its first couple of year of implementation because there was a set amount of emission permits allowing a certain amount of pollution. The permit emissions were distributed, bought or sold to individual companies. Eventually companies stared to become and want to become more efficient and less polluting so that they were not forced to buy an emission permit so it was in their interest to become less polluting. In this aspect this form of reducing emissions worked. However this took a while because a company cannot go greener from one day to another (short run) it required the long run for this to be accomplished. Also even though some companies were able to reduce their emission others weren't and therefore when the other companies did they were able to sell their emission permits to the companies that were not able to. So the even though not as many companies were producing pollution, there were a few companies that produced the pollution that the other companies didn’t, therefore the pollution level was the same.
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The economic profit a firm makes from producing using fossil fuels is vast compare for the price of a permit. If there was a tax it could be matched to the amount of carbon they emit. Although the tax is fixed it would increase with the amount emitted. The problem with the permit is that it allows firms to emit as much as they want, and when they trade it more carbon is emitted. Of course the amount of permits is decreasing rapidly, and as Christian says, soon the price for a permit will be so high that it makes more sense to invest in new techniques of energy production. In a way the firms are paying to pollute the earth, this makes it seem like money can turn back the problem of global warming. But at the moment I believe that allocating jobs to unemployed people and sorting out the economy should come before saving the environment.
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Basti and Christian bring up good points in saying that, as the supply of these permits decreases, and their price therefore increases, it may become more logical to invest in new technologies to decrease the emissions in the first place. I also think that this emissions trading system will provide incentives for firms now to decrease their emissions. In addition, because the right to pollute is now distributed by the market, firms that can easily decrease their emissions will do so and save money in the process, while firms that cannot as easily decrease emission will need to buy permits. This way, decreases in emission will occur most where firms can most easily decrease their emissions.
This trading system deals with emissions; how could we tackle the issue of firms externalizing on the cost of living (like in the sweat shops in Honduras).
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I think that creating extra costs for companies in a world wide recession is quite "harsh" like Laura already said. I don't think it is a bad idea though, because companies and everyone need to become more aware of the damage that they are causing our planet. The way we are living right now is not sustainable in the future and will have such immense consequences for the coming generations. I think that it might a bad time to introduce such extra costs to companies but I think that it is an important step for our future. I also agree with Laura's point of saying that many companies have already become more environmentally friendly by cutting down production (due to money issues) which has causes less waste products and overall benefits our world.
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The goal of both taxes and tradable permits is the reduction of carbon emissions. Taxes are now in place, based on the amount of carbon emissions produced by a firm. Unfortunately it is obvious the taxes are not high enough, giving little incentive to the firms to invest in a clean technology. Tradable pollution permits would establish an effective barrier to the carbon emissions, as they are controlled by the market. The fact that the price is determined by the market has the huge advantage of not being connected to the government. It is a known fact that today the US government is highly influenced by the major corporations, making it almost impossible for the government to impose higher taxes that would hurt those companies. But a corporation cannot argue with a market! And so, to remain competitive, although their short run costs would rise, their long run investments into clean technology would pay off.
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1. The tradeable pollution permits are more politically viable because they will most likely fair better in a market. With this firms are given an incentive to produce under the permitted amount and then create extra profit by selling their remaining emission numbers to those firms who produce pollution over the allotted amount.
2. Europe had trouble in the beginning because the initial permits allowed for too high an emission. so many firms who already produced under the amount were able to sell their extras. since the number was so high to being with, the market of emission trading was flooded with remaining permits thus making it easier for the large companies to purchase the permits rather than cut back on pollution.
3. yes it is a good idea because this will create an entirely new market thus generating more jobs in this area and an increased circulation of money.
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The tradeable pollution permits make sense because it would be fitting for the market because businesses (being profit maximizers) want to save as much money on costs and gives them the opportunity to produce under the amount of pollution speciied by the permit and to save money and use that towards maximizing profit.
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It is obvious that Europe was a failure because either one; the firms have a lot of money to spend on these taxes, because of their minimal use comparatively to the United States. Or two: because the taxes were simply not high enough. If the government were to raise the taxes to almost a ridiculous amount, it would give the firms a LARGE incentive to change their emissions to a more eco-friendly system, thus solving (not completely) the tradeable pollution permit problem.
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Trading permits work on the principle of market allocation meaning that they are allocated by supply and demand. They are often times more efficient than taxes on emission. As in a free market, as the supply of these permits decrease due to rising demand, firms that want to pollute will have to pay higher prices for them. If the firms are unable to or are not willing to pay it they will leave the market or be forced to make the factories more efficient (by investing in green technology). Taxes on the other hand will allow the produces to maintain pollution as long as they pay taxes, there is no incentive to stop or purchases green equipment. furthermore there is a dead weight loss attached to the tax, and a very minimal gov. rev. gained.
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Why do you think tradeable pollution permits are more politically viable than a direct tax on firms’ carbon emissions?
Why did Europe’s carbon emission permit market fail to reduce emissions over its first couple of years of implementation?
Is making firms pay to pollute a good idea in the middle of a recession? Do you think that we should even be worrying about the environment when millions of people are losing their jobs and entire industries are struggling to survive?
Tradeable pollution permits are more politially viable than a direct tax on firms' carbon emissions. This way the firm needs to pay for the pollution they have caused. The government could easily step in by setting taxes, however the problem would be how can a value of damage be decided. This would be a larger area to focus on and would make the decision more complicated. Pollutions permits tells the company how much they can pollute, and they pay for it. If a company does not use all permits, they can be traded and the demand is kept up. As demand rises, the cost per permit also rise. Many firms will not be able to pay the extra costs and need to drop out of the market; or find other ways of producing. One of the problems the pollution permits bring however, is how the pollution of firms can be monitored. This requires loads of thinking and processing for it to work.
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Tradeable pollution permits are more politially viable than a direct tax on firms’ carbon emissions. This way the firm needs to pay for the pollution they have caused. The government could easily step in by setting taxes, however the problem would be how can a value of damage be decided. This would be a larger area to focus on and would make the decision more complicated. Pollutions permits tells the company how much they can pollute, and they pay for it. If a company does not use all permits, they can be traded and the demand is kept up. As demand rises, the cost per permit also rise. Many firms will not be able to pay the extra costs and need to drop out of the market; or find other ways of producing. One of the problems the pollution permits bring however, is how the pollution of firms can be monitored. This requires loads of thinking and processing for it to work.
Europe's carbon emission permits failed in the market due to overallocation of permits. Overallocation means too much of a product is produced for a society. In this case it means that too many permits for a too low price were sold. This way most firms could cover the costs, and many permits were set higher than pollution was produced. This way firms had no problem covering the cost in the beginning.
Personally I dont see the problem with using pollution permits, although many jobs might be closed at the moment. Of course it is not a support to most firms, as many jobs are already cut for cost reduction purposes. However if this problem is not worked on now, because there is a financial crisis at the moment, it will not vanish. The problem will incease and cost larger problems in the long term. Altough short-term it would be logical to not worry too much about pollution whilst so many jobs are cut, we have to look into the future, and with the future into the reduction of pollution. It can cost even more jobs and lives later on.
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Tradeable pollution permits make the pemrits into a market as well so that the price for them is according to supply and demand and there is an equilibrium price which makes sense to the market.
During the first few years the price of these were so low that the firms didint mind polluting at a slightly higher price.
Making firms pay to pollute during a recession is not a necessarily bad because people should always be taxed for hurting the environment. Also this brings in money for the government so spend accordingly on bail outs or other economic plans to stimulate the economy. However it may put a strain on some industries causing some less desirable results in this case the governemnt should cut the tax and possibly subsidise just until they are considered stable.
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2.Why did Europe’s carbon emission permit market fail to reduce emissions over its first couple of years of implementation?
Europe's carbon emission permit market failed at first because there was difficulty adjusting the amount of permits that firms were allowed to have. This is a reasonable concern, since it is hard to judge such things. How much should each firm be limited to? However, it is good to see that the EU managed to set the amount of permits to a level at which emissions finally dropped in 2008.
3.Is making firms pay to pollute a good idea in the middle of a recession? Do you think that we should even be worrying about the environment when millions of people are losing their jobs and entire industries are struggling to survive?
This may indeed put strain on firms, who are facing enough trouble as it is. However, paying for pollution should be a fixed cost; that is, firms should pay to pollute, no matter the circumstances. We have realized that the environment is deteriorating, and have to realize that strict measures must be taken. This, in my opinion, involves paying for pollution.
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3. Is making firms pay to pollute a good idea in the middle of a recession? Do you think that we should even be worrying about the environment when millions of people are losing their jobs and entire industries are struggling to survive?
The problem with waiting for an end to the recession is there is no way to tell when it will end. This is problematic because the Marginal Social Costs of pollution is increasing at alarming rates. With having firms pay to pollute, this can encourage firms to find ways of maintaining functionality without shutting down while simoultaneously lowering carbon emission. If this becomes a worldwide trend among firms, the future of our planet could become less bleak.
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1. Why do you think tradeable pollution permits are more politically viable than a direct tax on firms’ carbon emissions?
People generally dislike direct taxes. This is often born of a commitment to see their country rot rather than contribute even the smallest portion of their income to the nation that they claim to love.
2. Why did Europe’s carbon emission permit market fail to reduce emissions over its first couple of years of implementation?
The governments issued too many permits. The permits dropped in worth, and businesses were able to pollute to their heart's extent without suffering much cost.
3. Is making firms pay to pollute a good idea in the middle of a recession? Do you think that we should even be worrying about the environment when millions of people are losing their jobs and entire industries are struggling to survive?
The world will not stop getting hotter just because unemployment is up. If not now, then when? People will always have a reason for why this plan should not be put in place. The fact is, it's necessary to reduce pollution. These problems will not wait until we are better able to deal with them.
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Gelando,
Would you say that in the long run, this plan will make firms more economically viable? They live on this planet the same as the rest of us, and will also feel the effects of global warming. By reducing pollution now, they save themselves from major losses they will experience in the future due to this pending environmental catastrophe. This means that despite the recession, this plan is in the economy's best interests.
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1. Because tradeable pollution permits operate through the market via the price system, firms are given a profit incentive, and such a system would be cheap to regulate and implement. They are more politically viable because they are not a form of direct tax or reduction in profit, which can generate a large amount of discontent, especially amongst big business owners, and this can subsequently affect future relations between the government and big businesses. Tradeable pollution permits are a 'softer' measure – a compromise – between big businesses and the government, hence they are more attractive because both sides, companies and the populace, can benefit from them.
2. This is because E.U governments flooded the market with permits, and the oversupply caused their value to plummet, which in turn made it easier for big corporations to bypass the restrictions by simply buying more permits, thus neutralizing the original purpose of carbon trading schemes.
3. Environmental sustainability cannot be achieved without posing a cost to maximizing human happiness and development, and vice versa. There will never be a 'good time' to implement any kind of radical strategy to save the environment, and there will always be fierce opposition to any kind of policy because what is good for humans and the planet in the long run may not be obviously good for us in the short run. As a generally selfish race, we are incapable of looking past the present and foreseeing the consequences our actions have on the future of our lives on this planet.
I think that the rate at which our planet is 'dying' is increasing at an exponential rate, and this is a result of rapid human development that does not take into account the costs to the environment. Thus I believe that long term, strict and non-negotiable policies must be implemented as soon as possible, although in reality this will be impossible. The damage that environmental policies will have on our economic development at any given point in time is a sacrifice worth making to ensure that we actually have a planet to live on in the future.
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Amit,
You made a good point; that the money received from firms by implementing strict environmental regulation policies would mean a larger revenue pool for the government from which they could better fund bailouts and economic recession. But possibly the money would be going in a circular motion: the money received would be mainly used to fund companies who cannot cope with rising costs, and these would most likely be the companies faced with environmental taxes in the first place.
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I think that there are many reasons why the pollution permits are more viable than a direct tax. For one, the pollution permits are a device that can be gradually phased out over a period of time until they are all very scarce. Applying a direct tax is a completely different animal. The rate would have to continually be adjusted over time as the plans to reduce carbon emissions changed. In addition, factors such as the rate of economic recovery as well as inflation would have to be considered in determining the rate. Also, President Obama would be asking for a tax increase. In American politics, voters typically aren’t going to be gung-ho for higher taxes even if it’s for this type of purpose.
They initially put too many permits on the market. This excess of permits made the system a joke. European officials soon figured out, though, that the system wasn’t working and got to correcting their mistakes. That’s why, if the U.S. should employ such a system, the legislation should include a commission with the purpose of regulating the program and controlling the number and extent of permits floating around in the market.
Unlike the economy, there is such thing as “irreversible alteration” of the environment that no amount of political will can overcome. While jobs are a very pressing concern, we cannot neglect Mother Earth in one of her most dire times of need. Besides, if businesses can find profitable ways to shift to alternative energy sources, we may see an explosion in job growth in the form of “green-collar” jobs. We don’t need to make a trade-off between the well-being of our economy and the well-being of our environment. We just need smart legislation to address both concerns.
Trevor Tezel
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Mattea,
I got to say I got quite a kick out of your response to the first question. Might you be harboring a certain discontent towards the political boulders in our American legislative system which refuse to move if even for the benefit of their own country? I have to say that the basic premise that Mr. Welker lays out in the fourth sentence of this page is one that some still argue over in our country and would probably explain why we never signed the Kyoto Protocol (“those darn international agreements trying to override our Constitution”) and are so behind on the carbon permit idea. Great response and I only pray that soon our detractors can wake and see the light and feel the heat of our wonderful planet crying for help.
Trevor Tezel
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1. Well, for one, people might not respond well to direct taxes which would affect Obama’s political career. Another reason is that tradable pollution permits don’t cause a decrease in profit; in fact firms are given a profit incentive. A pollution permit is a good in between agreement that will keep both the government and companies happy.
2.The governments issued too many permits and they eventually lost their value, so companies just went on polluting and the permits stopped doing any good.
3. The environment is something that will not go away. The recession will be solved eventually, but unless we do something about the pollution now, it will just get worse as it already is.
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Mattea,
I liked your answer to the first question. Your absolutely right, they "love" their country but as soon as there is a possibility that taxes will be increased to improve health care or the education system, there is an uproar. I agree that the environment should be a priority, it will only get worse and worse.
Sara
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1. Tradable pollution permits are more politically viable than a direct tax on firms’ carbon emission because taxation would only increase the price for the emission and not necessarily decrease the factory’s pollution emission. All the firms have to do is to keep on paying the tax to keep on polluting; however, the tradable pollution permits enforces the firms to invest money on decreasing emission because they are allowed to emit pollution to a certain amount.
2. Europe’s carbon emission permit market fail to reduce emission over its first couple of years of implementation because the government over-provided the outset and dropped the permit price to half the original, ultimately, making the firms relatively easy to purchase the permits.
3. Making firms pay for pollution is NOT a good idea because the firms must first stabilize itself from the damage it suffered from the economic downfall – the firms would not have the budget to invest into searching new technology for less emission. The cost of millions of people losing their job and struggling to survive is cheap compared to the environmental well-being of planet Earth – but this is a matter of perception. Personally, I think imposing payment on firms during recession is not the ideal way of coping with environmental issues – we must first recover the firms from its damage, then, work on a method to save the planet.
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Sara>>
Regarding to your answer to question three, don't you think its a matter of situation, beliefs, and values that determines the answer to this question? What if you were one of the people struggling to survive after being laid-off by the firm? If I was in that situation, I would definitely prioritize the recovery of the firm rather than the long-term survival of planet Earth.
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1.Why do you think tradable pollution permits are more politically viable than a direct tax on firms’ carbon emissions?
By using trad able pollution permits they are able to target businesses that are the worst at polluting the world today. using a direct tax would see an increase in price and also would effect every business and therefore would benefit greener companies by doing it by tradable ones means that greener business can receive benefits which will increase competition and force companies to go green to help reduce costs. They are also able to fluctuate the price of these which wont have such a dramatic effect that an increase in tax would.
2.Why did Europe’s carbon emission permit market fail to reduce emissions over its first couple of years of implementation?
this is due to the strategy that Europe took when doing this they over crowed the market with all of the permits leading to large supply therefore ending up with a plummeting price as there were so many available the big businesses were able to purchase multiple permits at limited prices not having any effect to the business and so production remained the same and they didn't feel the need to change there ways and look to go greener as there would be no benefit to the business.
3.Is making firms pay to pollute a good idea in the middle of a recession? Do you think that we should even be worrying about the environment when millions of people are losing their jobs and entire industries are struggling to survive?
The issue of the environment is very pressing at this current moment in time leading to many world disasters that do have knock on effects to the economy of the world today probably increase the time for recovery out of the recession we are in. the scarcity of products currently being used to fuel are economy is petrol and as we start to run out the prices will soar and so a new greener way will be needed soon so there isn't a crash in the market as we see the increase in price .
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Masaya.echl.f09
this regards your answer to question three. I disagree with the point that you make i think that becoming greener can help the economy, ok maybe the large some of capital needed for some of the major projects should be delayed but as we have seen with haiti natural disasters are happening and it causes knock on effects for the economies as we look back at Katrina and the effect this had on the American market was massive this could severely harm America if it was to happen at this time. another key point would be that off the use of oil this seriously needs to be addressed in the near future with its for ever increasing price this will have economies and businesses once it gets to high economies could come to stand stills.
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1. I think that tradeable pollution permits are more politically viable than a direct tax on carbon production. This is because, in the United States at least, many of the highest carbon-producing firms are large private businesses. As per the recent Supreme Court decision, large and rich firms ARE the political system, and therefore anything, regardless of public benefit, that might slightly cut into a CEO’s payroll is clearly not politically viable for the citizens of the US.
2. Europe’s carbon emission permit failed to reduce emissions over its first couple of years of implementation because too many permits were issued. These permits were not scarce enough to cause high prices, and therefore the incentive for firms to reduce carbon emission was not great enough to create real change.
3. I think that making firms pay is a difficult but necessary choice, even in a recession. Public welfare and environmental responsibility are not mutually exclusive. Allowing funding for both might require for a rethinking of economic structures. However, if we do not look after the earth and focus only on unemployment we will not have a planet on which people may be unemployed.
Chamonix
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Mattea,
I completely agree with your answer to the first question! You brought up a very good political point, which is that often the biggest excuse for putting profit over general welfare is love of country, which is pretty hypocritical. I'm sure that we can all think of many, many examples of this–more than a few of them in the United States!
I also liked how you asked the question regarding working for the environment, "If not now, when?" This question is of course incredibly pertinent to our suffering planet. But it also applies to the unemployment issue, to ending corruption, to spreading merit goods like education and decreasing demerit goods like drugs. I think that this is a concept which we can all take to heart for creating positive social change. It also has an economic message about the immediacy of all things economic and the speed at which fluctuations can occur.
Thanks for raising these great points!
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1. Tradable pollution permits are not more politically viable than a direct tax on carbon emissions because it provokes a sort of black market. Soon enough there will be pollution permits traded for other goods and it will cause conflicts between industries because a new market has formed in and of itself.
2. Europe’s carbon emission permit market failed to reduce the amount of emissions during the first couple of years because there were too many permits allocated out and they immediately halved in value and it became easier for firms to simply buy the permits rather than to bother to cut down on carbon emissions.
3. Making firms pay to pollute is not the best idea during a recession because it will surely cause a rise in production costs, meaning that the industry will have to find a way to cut down on costs to maintain equilibrium and the best option in to fire some employees. No we shouldn’t be worrying about the environment because there are more apparent problems at hand.
-Dennis-
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Chamonix,
Are you sure that the carbon permits are more politically viable than direct taxes? I mean tradable carbon permits seems like an idea that would go sour really quickly because people can't really be trusted to uphold the system, basically I mean its too unorganized. I think the formation of a black market is inevitable in a market like that. Anyhow, I'm also wondering why you would immediately implement this rather than letting some time go by so that the recession can pass. Implementing this policy in the middle of a recession is not going to save the planet that much earlier, right? On the other hand, implementing this policy could destroy the entire economy in less than a year. I'm just trying to say that there is a priority at hand..
-Dennis-
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1.) Tax increases are generally viewed as a bad thing, and therefore a direct tax on firms’ carbon emissions may be considered too aggressive. A tradeable pollution permit gives a firm an incentive to cut down on pollution that is different from essentially paying a fine for heavy emissions.
2.) Europe’s carbon emission permit failed to reduce emissions because there were too many permits issued to begin with. Firms could very easily access the permits, and so they had no real incentive to decrease their carbon emissions.
3.) I think the environment is paramount to all other values. The basic idea is that people survive because of the environment. If the environment is not protected (but rather destroyed), human life will deteriorate. Recession or not, people must first protect what surrounds them. There’s no time like now to protect the environment. If industries pile nuclear waste and other pollutants everywhere, they will just have to deal with it in the future. So, the question here is not whether or not firms should have to pay to pollute, but when they will have to pay for it.
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Hi Dennis,
I think your response to the first question is really cool. It's interesting that you look at the permits in terms of a black market. Do you think that a tax would be better though? I think the main difference is that the tax would be criticized upfront, whereas the permits would be criticized later (once, say, there was a black market for them). Also, do you think taxes would create a great enough incentive for firms to cut down on their emissions?
- Catherine
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Why do you think tradeable pollution permits are more politically viable than a direct tax on firms’ carbon emissions?
Direct taxes on the firms will have minimal effect, as it isn't as effective as these permits. These permits allow a set maximum to be set on how much pollution a company produces, they know what they are up for. Its simple and clear. I like Chamonix comment about how large corporations ARE the political system, I agree with that as they tend to have a big influence on the economy. Example is US banks not willing to save Lehman Brothers during the recession. The permit system is clear and effective however Dennis approach is very interesting about the black market, and I wouldn't be suprised if he is correct about this. As well as a black market for the businesses with these permits, if you read the amount of money these permits bring in, its an astonishing amount! And here we are argueing in Copenhagen about the cost of all this! Bit silly really!
Why did Europe’s carbon emission permit market fail to reduce emissions over its first couple of years of implementation?
Europe clearly overestimated the amount of permits it needed to start of with. Which in my opinion was a major mistake, however it has recovered and now the system is starting to work. As the amount of permits has been decreased and the scheme is working.
Is making firms pay to pollute a good idea in the middle of a recession? Do you think that we should even be worrying about the environment when millions of people are losing their jobs and entire industries are struggling to survive?
Personally, this topic has been raised late enough, and its a very controversial topic. As now some of the findings from scientists has been proven wrong. Is it fair on all these people that have been losing their jobs? Yes, because its time something was done on Global Warming and companies get a bigger shock. No, because we need the tax payers money to fund all these projects that are going to help solve this problem. The people who have lost their jobs might now not be willing to hear the pleas and cries from government leaders. Business are a cycle of boom and bust and this is just another one of those cycles we are going through, so they might as well take the global warming issue on board as well!
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It is not easy for politicians to stick a price on the social marginal costs, which they would have to do when taxing the carbon emissions of firms, while tradeable pollution rights dictate how much a firm can pollute – which is of course easier. Tax on carbon emissions would result in higher prices being passed on to the consumer buying a product from the firm, but this would not give the firm as much incentive to reduce pollution as the ability to profit from selling tradeable pollution permits. In other words firms and consumers will prefer tradeable pollution permits as they reward the firm for polluting less in stead of punishing them and raising prices of their goods, and in order not to lose support politicians are probably more likely to opt for the permits option.
Europe had overallocated the permits, thus creating a surplus of permits that can be bought at lower prices which encouraged the profit-seeking firms to buy permits instead of looking at reducing pollution.
It is obviously not very ideal to make firms pay for their pollution while they are struggling to stay in business and might have to fire employees to be able to afford the extra costs, thus prolonging the recession and making it increasingly hard to invest in the environment. Then again, the money invested in the recession instead of in the environment and the allowing firms to pollute without paying for it will undo a lot of the work already done to improve the environment.
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Catherine,
I agree completely with what you say and your last point about human life deteriorating if they don't protect their environment is excellent. However, I do think that human life will deteriorate rapidly as a result of unemployment, and unemployment will increase at times of recession and more so if firms are taxed for their pollution. During a recession firms will not have the resources to research ways of making their production process more efficient and decreasing their pollution, so wouldn't it be more advisable to give the firms a chance to recover?
-Eline
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agree that the permit system could work in most industries, I believe that the government should allow certain companies to get around the system. For example pharmaceutical companies. If they are providing medicines or vaccines and they are made using methods that pollute. If there is no way for the company to produce the drug without polluting then either that drug is going to rise in price or come off the market, neither of which are good for society.
Europe’s carbon emission permit market fail to reduce emission over its first couple of years of implementation because the government over-provided the outset and dropped the permit price to half the original, ultimately, making the firms relatively easy to purchase the permits.
Some good examples of these are GM, Ford and Chrysler. If any of these companies fail it would cause huge numbers of people to lose their jobs, not only from one of those companies but from the supporting industries as well.
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ralph,
i think you could amplify your answer and expand your comments. look at the possible answers from different points of view.
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1. If we tax all the firms the same amount they wont be happy about that. The only firms that might agree with that are the ones that pollute a lot. But firms that produce not much pollution will find it unfair and so they will blame it on Obama so politically this wouldn’t be good for him. I think that tradable pollution permits are politically better than taxes because with those each firm buys as many as they need/can afford. If they can afford as many as they pollute then that’s good for them. But if the prices are high pro permit then firms wont be able to buy so much so won’t be able to pollute so much and it will help the environment. And it would be more fair as the firm can choose how much to invest for pollution.
2. The government issued too many permits so these permits lost on value and so firms just bought more permits to the low price and so could pollute a lot again.
3. I think it is ok to make firms pay to pollute even thou we are in the middle of a recession. This is because we can’t just put all other problems to the side because we are in a recession. If we let the world continue to be polluted then it is going to take even longer and more money than if we try to get a little control over it now.
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Hey Laura,
I think you thought well about the pharmaceutical companies that they should be allowed to get around the system or at least be able to buy the permits at a cheaper price, as this is an important market. But on the other side then I am sure it would be possible to argue about nearly any market that it is very important and if the production isn’t continued fully because the permits are to expensive the society will have lack of this product and so will have to ‘suffer’
Vica
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1. Why do you think tradeable pollution permits are more politically viable than a direct tax on firms’ carbon emissions?
Tradeable pollution permits are more politically viable than a direct tax on firms' carbon emissions because the act more within the framework of free market economics. This makes them less alienating to more right wing sectors of society, whereas many people regard direct taxes as "Robin Hood" tactics.
2. Why did Europe’s carbon emission permit market fail to reduce emissions over its first couple of years of implementation?
Europe's carbon emission permit market failed to reduce emissions over its first couple of years of implementation because too many permits were introduced onto the market. The excess of supply in relation to demand made for low equilibrium prices. This meant that companies could obtain extra permits to pollute more relatively easily.
3. Is making firms pay to pollute a good idea in the middle of a recession? Do you think that we should even be worrying about the environment when millions of people are losing their jobs and entire industries are struggling to survive?
The environment is always an issue that should be regarded as top priority. Global warming won't wait until we are out of a recession to continue heating up the earth. In fact, it is threatening to put the world into more economic turmoil if it is not addressed aggressively and immediately. The loss of coastal areas is just one of the problems that is being created. Soon many island nation who rely on tourism will find themselves without land or industry. That doesn't bode well for anyone.
-Issa
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Hey Mattea,
I loved your comment. I completely agree with you about taxes and about how ironic it is that people expect results, but are not willing to contribute. Do you think that this is a characteristic peculiar to the United States? Also, I agree with your statement about the necessity to concentrate on protecting the environment.
-Issa
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I think that the society wont respond to the direct taxes, affecting president Obama; also, this will benefit companies since the revenue wont decrease.
The government issued numerous permits, therefore, these lost their value so fimrs bought more permits to lower the price and to pollute more again.
I believe that its correct for firm to pay for their pollution made to the environmentsince this is a radical permanent effect on earth. The recession will be solved eventually, everything will become worse.
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Hey Laura,
Its actually true what you said aboutrmaceutical companies which should be allowed to get around the system or at least be able to buy the permits at a cheaper price, as this is an important market.
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1.Why do you think tradeable pollution permits are more politically viable than a direct tax on firms’ carbon emissions?
The problem with taxes is that, as many others have other explained, they tend to create a negative and actually unwanted response from receivers; however, it is indeed a punishment, since pollution is nothing less than almost illegal behavior. But taxes are quite difficult to set, since the appropriate amount is not clear. In the other hand, tradeable pollution rights operate through the market via the price system, giving firms a profit incentive to decrease pollution.
2. Why did Europe’s carbon emission permit market fail to reduce emissions over its first couple of years of implementation?
This was due to the fact that a type of "permit inflation" occurred; there were too many permits on the market, making the prices fall low, making it very easy to obtain the necessary permits at very low price to pollute as much as necessary.
3. Is making firms pay to pollute a good idea in the middle of a recession? Do you think that we should even be worrying about the environment when millions of people are losing their jobs and entire industries are struggling to survive?
Of course. In my personal opinion, the most important has always been the environment, since, without it, nothing, absolutely nothing would be able to subsist. I strongly believe that a "recession" is no excuse for destroying our home planet, and sincerely cannot understand how most people nowadays are so thankless, close-minded, selfish and definitely stupid to place economic development above the survival of the earth… well, of course, because when the earth is finally annihilated due to their careless work, they will no longer be alive… so what's the point of worrying, if they won't be here anymore?
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Armando,
You make a very good point when saying that eventually, the recession will be over, but the environment will not be cured. Of course, someday, the economy will re-establish itself in its approapriate position; but if this involved destroying our natural surroundings, then what's the point? Even if the economic crisis might appear as terrible, the destruction of our planet is much more serious and much worse.
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1. Why do you think tradeable pollution permits are more politically viable than a direct tax on firms’ carbon emissions?
Tradeable pollution permits are more politically viable than a direct tax on firms' carbon emissions because they do not represent stringent government measures. Firms still have the option of continuing production at high levels of pollution if they are willing and able to buy permits. This is a market solution to a negative externality,and is therefore better welcomed by the voting public, as taxes on firms also reduce consumer surplus.
2. Why did Europe’s carbon emission permit market fail to reduce emissions over its first couple of years of implementation?
Europe's carbon emission permit market failed to reduce emissions over its first couple of years of implementation because the supply of permits wasn't limited enough. With greater number of permits in the market, the economic value of each remained relatively low and enabled firms to continue producing at high levels of pollution with minimal additional cost.
3. Is making firms pay to pollute a good idea in the middle of a recession? Do you think that we should even be worrying about the environment when millions of people are losing their jobs and entire industries are struggling to survive?
I don't think that making firms pay to pollute is a good idea in the middle of a recession. Additional costs may force firms to lay off workers in the short run, increasing unemployment and thus negatively affecting national and international economies. Perhaps,if bail-out packages had conditions that firms must use some of the money to buy carbon permits, than perhaps carbon permits could still be a feasible solution to decreasing pollution levels.
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Why did Europe’s carbon emission permit market fail to reduce emissions over its first couple of years of implementation?
Europe's carbon emission permits were sold too cheaply for companies to be affected by them. This meant that they were so abundant that the price of each unit dropped to a level where companies did not feel the need to lower their CO2 output to avoid buying the permit. The result for the first couple of years was that European emissions kept on rising, until, since these permits are sold in a free market concept, the abundance slowly dried out. When this happened, the price of each permit increased, which made it more expensive for companies to pollute. The incentive then, was for new companies entering the "polluting" market to start up with clean energy and for the older ones to renovate their factories. This way they could all avoid the expensive permit. The result of this was a 4% drop in CO2 in Europe.
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1. I think that tradable pollution permits are more politically viable than a direct tax because the market determines the price of the permits. Even with an initial overabundance of permits, the decrease over time naturally corrects this and creates strong incentives to reduce carbon output.
2. Europe's carbon emission permit market failed to reduce emissions over its first couple of years because the permits were not scarce enough to warrant reductions of carbon emissions of firms.
3. Making firms pay to pollute is a reasonable idea in the middle of a recession because the pollution will have long term spillover costs which must be addressed as soon as possible. Current hardships pale in comparison to some of the hardships that continued pollution and inaction could have on the environment.
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1. Tradeable pollution permits are more politically viable than a direct tax because if they're tradeable that means that depending on the supply of permits and the demand for permits, the market will reach some form of equilibrium. Though this is less efficient than merely allowing "unlimited" carbon output, this is the next best alternative. A direct tax is purely speculative, whereas the price of permits is based on empirical evidence.
2. It failed to reduce carbon emissions over the first couple of years due to the overabundance of permits supplied by the government. There was demand for them, but the scarcity aspect of the price was not in play yet. It took a few years for the number of free permits to reduce in the market.
3. We should certainly worry about it during this time. There would never be a good time to begin taxing polluters. If we were in the middle of a golden age, people would complain that the government are going to end it prematurely, and if we were at a time further down the recovery road, people would complain that this will throw us back into a recession. In addition, without the environment, we don't have business. We kind of need to be alive in order for firms and their products to be at all useful to us. Also, it's a good idea to simply "kick people while they're down", because that way as firms attempt to recover, this is just another bump in the recovery road, so it has less psychological significance compared to if it were a new tax without any other problems going on.
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1. Why do you think tradeable pollution permits are more politically viable than a direct tax on firms’ carbon emissions?
A "free market" of permits created through this government intervention will reach a stable equilibrium where everybody is doing they best they can. Efficiency will be forced because firms are directly spending money to gain the rights to pollute – they're going to pollute as efficiently as possible to make use of that money spent. This incentive to be efficient will drive progress and development of new technology that reduces pollution.
2.
There were so many permits in the permit market that it was inexpensive to buy more permits and pollute. Later, after the supply died down, permits became scarcer and more expensive and therefore actually had an influence.
3.
Yes, because it will allow only the best of the firms that are able to overcome this tax during a recession to prosper. It creates a survival of the fittest scenario that improves the industry.
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1. Tradeable permits are more politically viable because this puts the firm in a negative light rather than the government; taxes are viewed by people as a government scam to earn money, therefore putting it in a negative connotation. This tradable permit is "tax in disguise" where it give the government more control and flexibility when it comes to firms polluting.
2. It failed in the first couple of years because the governments were handing out permits to firms too freely without restricting the supply, which defeated the purpose of the permit. There was a great demand for the permits but there was a great supply too, for they were not limited yet like intended in order to create a scarce supply.
3. I believe in finding a balance between charging firms to pollute during a recession, but I don't believe the whole permit should be eradication; it would be best if the permits were still in place but not at a large price that could further contribute to the loss of jobs. There should be different priced permits for different sized firms so small firms don't find them self in a position to drastically let go employees or shut down, because the obvious choice for the firm would be to fire people. When the recession is over the price of the permits can gradually increase.
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Discussion Questions:
1.Why do you think tradeable pollution permits are more politically viable than a direct tax on firms’ carbon emissions?
Tradable pollution permits are more politically viable than a tax because even if large producers of pollution are taxed, the prices will increase but they are still able to pollute, whereas if permits are used the supply can be altered which ultimately reduces the amount of pollution produced by firms. Taxes are also recieved negatively and it is hard to establish prices whereas prices for permits are set by the market.
2.Why did Europe’s carbon emission permit market fail to reduce emissions over its first couple of years of implementation?
Europe's carbon emission permit market failed because the supply of permits was too high and the prices were too low in order to decrease demand and force people to produce less pollution.
3.Is making firms pay to pollute a good idea in the middle of a recession? Do you think that we should even be worrying about the environment when millions of people are losing their jobs and entire industries are struggling to survive?
There is never a good time start making people pay to pollute and although the recession may not be a perfect time to move this forward, the enivronment is a constant problem that won't go away based on our financial problems, and it's our responsibility to do something to fix it. We can't ignore certain issues because we are faced with other problems such as a recession, governments just need to find a way to introduce this in a way that won't further hurt the economy.
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