Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 14

Developing an efficient approach to regulating CO 2 emissions is perhaps the greatest policy challenge facing many nations over the next decade. Not only will policy responses have to be flexible enough to adapt to emerging scientific evidence, but they must also be robust to the variety of political attempts to manipulate them to special interest advantages that are sure to arise. A few of the questions that will need to be addressed include
• How stringent should CO 2 caps be? Answering this question will implicitly show how much we are willing to spend to achieve CO 2 reductions.
• Whose emissions should be capped? Operating a cap-and-trade policy for power plants is relatively easy because there are few of them, but designing CO 2 reduction policy for other emitters is much more difficult and vulnerable to political pressures. For example, in principle, reducing automobile emissions might be obtained through a higher gasoline tax, but such a tax would not directly tax CO 2 emissions, so its incentive effects are more complex than in the power plant case.
• What to do with emission permit revenues? A large-scale cap-and-trade program will generate significant revenues. These may be used to finance other forms of government spending or to reduce other taxes. Views on the desirability of these different approaches will (obviously) vary widely.