side effect of an action on a third party, can be positive or negative. Third and finally, Martin L. Weitzman’s 1974 seminal analysis of the effects of cost uncertainty showed that the relative efficiency of taxes versus cap-and-trade systems depended critically on whether marginal damages or marginal abatement costs were more responsive to changes in pollution levels. The two policies thus tend to bring about equality of marginal abatement costs across emitters, a condition for cost-minimization. d) I, II, and III. In some models, however, Japan has relatively low marginal abatement costs and may actually gain under such a ceiling (e.g. c) I and II only. Question 3. The cap on greenhouse gas emissions is a limit backed by science. Both carbon taxes and cap and trade programs will result in least-cost abatement. The following two questions refer to the diagram below, which illustrates the marginal abatement cost curve for two polluting firms. Only a cap and trade system gives full rein to the market to discover prices. As economists have long emphasized, a cap-and-trade system is cost effective because it minimizes total abatement costs for each chosen level of total \(\hbox {CO}_{2}\) emissions via ensuring that every emitter in the jurisdiction sets its marginal cost of abatement … (2000), Japan is assumed to have even higher marginal abatement costs than the EU (and the US) and will lose from a ceiling on trade (e.g. III. – Compare MAC with cap-and-trade prices in other markets 1. b) II only. A higher emissions cap implies a lower carbon price, and a lower emissions cap implies a higher carbon price. Suppose a cap and trade program is introduced, in which firm 1 receives 100 permits and firm 2 receives 120 permits, in the initial allocation. Cap-and-Trade incentivizes investment in low-cost emissions abatement. Allocating allowance permits for emissions and then trading between firms enables abatement to occur where the marginal cost is lowest. Equalize marginal abatement costs across firms. Furthermore, marginal costs are no longer equated, and so aggregate abatement costs are increased. cap-and-trade program for power plants in the United States, for ex-ample, technological changes occurred so rapidly that marginal abatement costs (and hence permit prices) fell to less than half of what most analysts had predicted (Burtraw, 2000). In most models, according to Capros et al. Zhang, 2000b). Background • I t ti l t d i i i i th t d d b f thInternational trade is increasing in the recent decade before the ... • Higher cost on trade • Marginal abatement cost of slowing vessels 9. In addition, equilibrium allowance prices are suppressed as a result of the overall reduction in allowance demand, which causes concern with the ability of the cap-and-trade system to … a) I only. Similarly, there is evi-dence that the European Union's Emissions Trading System (EU ETS) for The ability to bring marginal abatement costs to Explain the cap and trade system. A cap-and-trade system and tax are two alternative ways that a government can intervene in order to each the efficient level of abatement (defined by the point where the marginal benefit curve intersects the marginal cost curve). Externality. A competitive cap-and-trade market achieves the emissions cap set by the politicians at least cost. of cap and trade, as it promotes the emergence of a single market price for emissions faced by all market participants at any given time. Deadweight Loss. Assume these are the only two emitters of pollution. a. The following question refers to the diagram below, which illustrates the marginal abatement cost curve for two firms.


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