Cap-and-trade through musical chairs: Short intro
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1. The document introduces cap-and-trade as a market-based climate policy where a government sets a cap that limits total pollution and distributes permits that can be traded. 2. It uses a "musical chairs" analogy to illustrate how a cap-and-trade system works, with the number of chairs representing the available pollution permits. 3. Under a cap-and-trade system, the cap is reduced over time to achieve emission reduction targets, and the price of permits rises as they become more scarce, incentivizing pollution cuts.
![Climate Economics ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],References: IPCC Fourth Assessment Report, Summary for Policy Makers, 2007. The Economics of Climate Change, Stern Review Report, 2006.](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)
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Cap-and-trade through musical chairs: Short intro
- 1. An Introduction to Cap-and-Trade Climate Policy Holmes Hummel, PhD hummelhh@mindspring.com November 21, 2007 Using Musical Chairs: An Illustration of Managed Scarcity
- 8. Would anyone be willing to trade their chair for $30 ?
- 9. Sure! For that price, I can finance an efficiency upgrade, eliminating my need for a pollution permit.
- 12. Using Market Incentives If I could I build wind farms to replace my coal power plants, then I could sell permits… 2009
- 13. Using Market Incentives Hey, I made a profit by reducing my fossil fuel use and avoiding carbon emission costs! 2010
- 16. Achieving Reduction Targets Who will be the last greenhouse gas polluters left in the game? 2050
- 20. Achieving Reduction Targets $90 $90 $90 How high can the price go? As high as it takes to motivate one of us to stand up. 2020 SELL PRICE:
- 27. Auctioning Permits vs Allocating for Free $0 $0 $0 $0 $20 $20 $0 BUY: Auctioned permits Free permits Why is this a cause for concern? 2. Unearned windfall profits: In a carbon market, firms that buy permits in an auction will try to pass costs to customers, and others receiving a permit for free can sell their permits at that same price.
- 28. Auctioning Permits vs Allocating for Free $0 $0 $0 $0 $20 $20 $0 BUY: SELL: $20 $20 $20 $20 $20 $20 $20 Unearned windfall profits Cost passed to consumers Why is this a cause for concern? 2. Unearned windfall profits: In a carbon market, firms that buy permits in an auction will try to pass costs to customers, and others receiving a permit for free can sell their permits at that same price.