Critical Thinking On Economics

Command and Control, Emission Charges, and Cap-and-Trade policies

Compare Command and Control (Emission Standards) just place a separate legal limit on the amount of pollutant a particular producer is allowed to emit. It is not really cost- minimizing policy.
Emission Charge is kind of a fee collected by the government which is levied on each producer for each unit of pollutant emitted. Producer reduces emissions until the marginal cost of reduction equals the emission charge. Each producer is seeking to minimize costs of emission, and thus looks for ways of limiting emission of pollutants. This leads to cost-minimizing optimality. It is hard to make appropriate charges at the first time. Moreover charges stimulate the development of new saving technologies, which also minimize costs.
The cost of achieving a given reduction in emissions will be minimized if and only if the marginal costs of control are equalized for all emitters
Cap-and-Trade policies impose a limit (cap) on producers’ emissions but they are allocated allowances to emit. Government lacks information about control or damage costs of each firm, which makes it hard to provide the best cost-effective policy. Cap-and-trade allows create really cost- effective control which is impossible with simple emission charges. Moreover, such auctions generate more revenue to the budget. This can be used to reduce other distortionary taxes (labor, income tax) and substantially increase welfare.
One way to achieve the minimal optimality for emission is to impose emission limits which would set a precise level of allowed emission, necessary to reach the equilibrium between emission and control costs. There are many ways to minimize the cost of control such, as relocating population, changing type of resources, changing type of pollution caused by a particular plant, but any of them is not universal, because each particular case is unique.
Here are some examples of successful policies exercised by different governments. Irish government imposed a levy 15 cent on each plastic bag sold. This levy was seen as incentive for customers to reduce consumption of plastic, and eventually decrease pollution related to the plastic production processes. This policy was an extreme success, creating 10 million euro revenue for government and reducing consumption of plastic down to 120 thousands. Swedish government used charges to limit the consumption of energy, so called nitrogen charge. On the other hand, Maine’s energy auctions proved to be profitable enough to be considered as another success.