CARBON TAX & TRADEABLE PERMIT

Carbon Tax & Tradable Permit

Carbon Tax & Tradeable Permit

Introduction

From the time when Pigou's (1920) influential input on the efficiency promoting the application of taxes to amend for negative externalities, the alternatives of instruments like carbon taxes and tradable permits for ecological policy have been comprehensively debated. The ecological economics theory has drawn a discernible difference amid the use of market-based incentives (MBI) and command & control approaches (CAC). At the same time as on a theoretical basis, MBIs are more preferred upon CAC because, in practice, they save cost relatively; CAC policies have been principally employed. This apparent dissimilarity was emphasized at the time of the ecological revolution which happened during the period between late 1960s and early 1970s. Oates (1999) proposes 3 justifications for this. First of all, during the time phase, there existed no body of citizens who could influence the view of economists (that is, conservationist were unquestionably antagonistic, industry was not very concerned and regulators were less than keen about abandonment traditional means of regulatory rules for a mainly untried tax system on pollution). Second, the condition of ecological economics during the same period did not extend beyond the general, theoretical stage. Third, there was an enveloping unawareness of the economic move towards ecological policy outside the economics line of the work itself. Recently, on the other hand, financial tools have played a greater than ever function in ecological policymaking, echoing their perceived dominance vis-à-vis CAC policies. Although the preliminary discussion focused almost entirely on the tax base, the extent has widened to comprise tradable permits. The debate has engaged on a new significance subsequent to the agreement in 1997 to diminish emissions of “greenhouse gases” under the Kyoto Protocol (Norregaard & Reppelin-Hill, Pp. 215-248).

Role of Taxes and Tradable Permit

Carbon taxes and Tradable permits are two market-based tools universally deemed by policymakers to police pollutions. While a tax is predetermined, fixed by authorities, the vague permits price is determined by market dynamics, varying with the prices of electricity and natural gas. Both instruments present organizations diverse incentives for implementing clean technologies.

Comparative Analysis of Merits

The main benefit of carbon taxes and market-based instruments like trade permits is efficiency when compared with regulatory tools (product bans, standards, quotas). Pollution taxes encourage each polluter to lessen the pollution down to the point wherever the additional cost of air contamination abatement is equivalent to the tax amount. In this way, we can attain static efficiency because the costs of achieving a stated ecological target are curtailed. Furthermore, polluters have added flexibility to select the point and the process of abatement. Levying taxes and charges normally necessitates fewer amounts of detailed data than regulation and thus cause lower administrative costs. Trade permits are market based instruments which put up a price on each unit of emissions/emission, and thus, persuade companies to search continuously for modern pollution abatements options, and to invest capital in technologies that contribute minimum to the environmental ...