Issuing tradable emission allowances to polluting firms will result in those firms polluting more than is socially desirable.

Question

Quizplus · Accepted Answer

Issuing tradable emission allowances can actually lead to a reduction in pollution as firms are incentivized to reduce their emissions in order to sell unused allowances to other firms. This creates a market for pollution reduction and encourages technological innovations and efficiencies that can ultimately lower overall pollution levels. However, the effectiveness of this system depends on the initial allocation of emission allowances and the stringency of the overall emissions cap. If allowances are allocated too generously or the cap is not strict enough, firms may continue to pollute at higher levels than is ideal.

Issuing Tradable Emission Allowances to Polluting Firms Will Result in Those