Carbon trading


Well-Known Member
Aug 22, 2006
So I notice that there's been a lot of talk recently about carbon trading schemes. I'm not going to comment right now on the controversy about what it's going to do for the environment, which is why this post is in the economics section:

The idea I want to focus on here is the quota- effectively you have certificates that hold some pecuniary value for whatever amount you undercut your quota, and apart from the penalties for going over, larger emitting companies are theoretically able to buy these certificates from the lower-emission companies.

Without knowing anything about just how the quotas and the values are to be decided, I'm wondering what effect this might have on businesses. I'm not an economist so I know of no theory that would give me an indication, although I do know that this appears to be a big change since it seems that previously corporations would operate usually irrespective of the costs incurred to the environment unless slapped over the wrists for doing so.
That would be horrible, if it happened. It really could be a possibility, though. Certainly the larger corporations would buy up as many of the certificates as possible, making the largest companies the most polluting. That would undercut any super-green operations of the smaller companies, I think.
I think there should be a standard quota for up to certain amount of production. The moment you pass that amount, then the quota goes up, and you are not able to buy from other with less production. Just like taxes. The industries should have their own customized system. If you produce up to 1000, then everybody is the same. But after 1000, then fines increase, and the higher the production the higher the fine. That would put the big pollution corporations into work for improvement!
The whole idea of quotas is that you use free market forces to make companies big and small own up to the cost of their pollution. There aren't penalties for going over your cap, you have to buy the credits for the pollution you produced above your cap.

There are lots of suggestions for how to bring the credits into existence, but the basic idea to treat all companies fairly is that theres an amount of pollution per dollar of profit that is acceptable. If you pollute less, you get credit for that fact that is a valuable currency to your business. If you pollute more, you have to pay for the extra pollution by buying credits. If you cant find the credits to buy, then you can't continue to pollute. Assuming there was mandatory compliance, it would force the entire population to limit pollution to a level where the earth can absorb it.

It does create lots of complications though: how to measure your pollution, or in the case of earning credits, how do you measure the cleanup? Are they things you would have done regardless? If so should you get credits for them? If I'm a business that inherently is more polluting, is it fair for me to have to pay more taxes than a business that is inherently less polluting? Until you answer all the questions of this nature, its really hard to evaluate the merits of such a system. The details determine the exact incentivization, and that ultimately is what will dictate peoples behavior.
Maybe I am looking at this wrong but if you are a company that pollutes more I would just think that you should pay more. I mean why should the smaller companies have to pay what the bigger companies are paying or the ones that really don't care about the pollution they may be spewing out?
Tater, all the credit systems (or at least the ones I know of anyway) work as you're describing. The hitch is figuring how how much baseline pollution a company can generate before they have to start buying credits. Its widely accepted that the earth can "regenerate" a certain amount of pollution a year, so its reasonable to think that some pollution should be acceptable for free.

If you imagine a national economy producing 1000 widgets a year total, and you defined 1000 pollution credits to cover the acceptable annual pollution, you would need to find a way to distribute them to the national polluters. If there were two companies in that economy, one that produced 5 widgets and the other that produced 995 widgets, you can imagine that the one that produced 995 widgets also inherently produced more pollution. Would you give 500 credits to each company? Thats a huge windfall for the small company, and a huge burden for the large one. If it worked that way I could just start a company for no reason other than to get a free cut of pollution credits to sell, which wouldn't really be fair. The better way (in my opinion) would be to give 995 credits to the larger company, and 5 credits to the smaller one. That way the measure of your polluting is relative to the value you're putting into the economy.
This is a new topic, I hadn't heard anything about this before. Is there a link or something so I can read and get up to speed?