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Tuesday, November 07, 2006

Emissions Trading Scheme


I read an article in The Economist (Oct 21st-27th 2006) titled “Terminating Greenhouse Gasses.” The article was about Governor Schwarzenegger’s plan to set up an Emissions Trading Scheme between California and other states. I think this is a good idea, if it is done correctly (the economic way). Europe has developed an Emissions Trading Scheme, with a goal to cut emissions, get polluters to pay for damages and invest in greener technology. This sounds great to me. It’s just like the example from class. Pollution is a negative externality that causes inefficiency in the market. This can be corrected by making the polluters internalize the externality. This can be done by making polluters pay for the right to pollute (an amount equal to the externality for each unit produced). An Emissions Trading Scheme could do this if polluters had to pay for every unit of pollution. The result would be less pollution, and there would be incentives for companies to invest in greener technologies. In order for this idea to work, the polluters must have an incentive to pollute less. In Europe the policy is not working, because the polluters were given polluting rights for free, which took all the incentives to pollute less away. The externality isn’t being internalized so the policy isn’t working, but if Schwarzenegger does it right his policy should work.

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