Comment on the statement that only carbon trading is likely to be an effective and efficient way of reducing C02 emissions.

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Comment on the statement that only carbon trading is likely to be an effective and efficient way of reducing C02 emissions.

Carbon trading is the process of buying and selling carbon credits. Large companies or organisations are assigned a quota of carbon that they are allowed to emit. If a company's emissions are less than its quota then it can sell credits if emissions are more then it will need to buy carbon credits. This may be effective in the way that companies will try to reduce their carbon emissions in order to reduce cost incurred from purchasing extra carbon credits. However this may not be effective if the opportunity cost for reducing their carbon emissions may be greater than if they spent the extra amount of money to purchase other company’s carbon credits. Therefore there will not be much of a change in a company’s emissions. Therefore this will only be effective if the government enforces to a certain standard as if they do not then company’s may disregard it and continue polluting. “Developing countries would face a lower burden in reducing emissions than developed countries”. This is because developed countries have more industries such as steal which require huge amounts of carbon to be exerted into the atmosphere, whereas developing countries won’t have many of these industries and it will be easy for them to stay below their quota and may then even be able to sell their permits to more developed countries on the open market. You will also need tight limits on regulations, we need huge transfers of wealth to poorer countries to be effective as these countries may not be able to afford the permits if they end up going over their limit.

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The supply of these permits are fixed. Therefore if there is an increase in demand for permits from D to D1 then this will cause an increase in price from P to P1. However the quantity supplied will remain the same as governments only provide a limited amount of permits which are not determined by demand.

We also need to look at the efficiency of carbon trading, this is whether it produces Allocative and productive efficiency.If any of these methods are economically efficient, then they should produce at the Social Optimum Output. There are many market failures ...

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*** This essay raises most of the arguments for and against carbon permits but there are some fundamental misunderstandings. Its big attraction is that it is market based so after the initial setting up of the scheme and the regulatory bodies then it can be left to run itself. A big disadvantage is the need for international cooperation. without it it cannot work as all the polluting companies will move.