Course:ECON371/UBCO2011WT1/GROUP 7 - b
Article
Summary
The article talks about how in California they have passed a new law for regulating and setting limits on greenhouse gas emissions and make an effort to subsidize oil refineries, electricity generators, and other plants to clean the plant up. This plan will be in effect in 2013, and the board Is saying that they “are carting new ground here”. It’s a new concept and California wants to be the first to try it so the rest of the country sees how it works, and then follows them knowing the states’ past history and its devotion to environmental leadership. The plan about this came about from the past law in 2006 of “Cap and trade” and it talks about that and how it is used for putting a limit to how much each company can emit carbon and greenhouse gas. The government issues permits to each company allowing them to emit a certain amount. However companies like oil refineries are not happy with this and think this is not “cap and trade” but “cap and tax”.
Annalysis
There are many interesting things in this article, Firstly that the technology to do all this was always there and could be used however no one took the initiative for cutting down emission by companies and putting a stop to excessive emissions without consequences to the environment and the global world. California has paved the way forward, and according to them the other states will follow.
First thing we have to look for, is that the government has to find a way to figure out how to cut down on the accumulative pollutants, because the article is talking about cutting emissions from oil refineries. Accumulative pollutants are usually at a regional stage so pollutants from California might go all the way to Arizona and other nearby states. Cutting down the emissions and cleaning the emissions that are already there is not only beneficial for California but for the rest of the country and same goes for the other states as well who have to join the race and contribute to the environment somehow. Secondly, they talk about companies can sell their permits to other companies if they don’t need it. This idea is a very smart initiative because it will create the best way to equilibrium. Whichever country needs the permit the most will pay the most they can to buy it. This will create the chance for people wanting the permit the most, getting a chance of actually getting it. The people with the most willing to pay will get to get it. Moreover, if one year permits are not all used emissions will be lower that year. This way, the companies know how much they can produce and if they go over they will get penalized. However, this creates another problem; how much will the fine be to cross the emission level limit? One thing is for certain, the fine has to be a kind of number that will make company not think twice but three times about crossing the emission level. If the fine isn’t hight enough the company will pay the fine until their MAC curve is equal to the MD curve. The company will keep paying the fine until equilibrium is reached because if they go beyond that point marginal cost will be higher than marginal damage.
The Optimal level for emissions should be at E1 when the marginal damage and marginal abatement cost cross each other at equilibrium and it will be achieved if that many permits are given out so emissions more that that will not occur, and if they do then they will get fined substantially. The government has to look out and always be in touch with every company and how much they emit. Coming up with rules is the easy part, the real thing is keeping in touch with every company and digging in to find out their actual number of emissions. This will cost the government money, however if the Marginal benefit is higher than the marginal cost, the policy should be taken up because the net benefit is positive meaning the policy is giving out more benefits than the cost itself.
There are skeptics of this program however, In theory the policy works out the best and is one of the cheapest way of method to cut down emissions. You have to have “watch dogs” just to keep the companies in check with their emission levels. Therefore, the policy is not a technological advancement per say but in a way it’s an advancement that will lead to it. The idea is brilliant, it just has to be laid out and implemented correctly.
Prof's Comments
The cap and trade proposal for carbon in California is much like the sulfur dioxide program run by the EPA. The idea is to create a price for carbon by imposing a limit on how much can be emitted and allowing polluters to trade credits. It fits very well with the example in the book. How are the permits distributed? Who is included in the market? You are right that for efficiency, need to know where MD and MAC are. What will the market tell us? What are the incentives created?
7/10