ECON DB2 Essay Example | Topics and Well Written Essays - 500 words

ECON DB2 - Essay Example Cap and trade allows for tradable pollution permits. A tradable permit policy sets specific targets on total emissions and allows reallocation or auctioning of pollution permit allowances to industry polluters to meet their objectives. Companies that are able to limit their emissions more cost-effectively have the incentive to avoid purchasing more permit allowances and even sell their permit allowances in excess to polluters with higher demand of compliance. Under this type of approach, emission are set by the cap, however, the overall costs for compliance may be uncertain. With regards to Cap and Tax, a regulatory system is set that provides incentives for polluter companies to find cost-effective mechanisms for controlling their emissions. Firms will therefore pay taxes for their emissions if at all it is cheaper or reduce their emissions to avoid the imposition of tax for their damages to the environment. In cases of taxes to regulate emissions, the cost of compliance is known, but the levels of emission may be rather uncertain. A command and control approach sets fourth Emissions standards that are generally more stable as compared to carbon market controls. It is undeniable fact that trading markets, more so for carbon emissions can be unpredictable. Profiteering requires stability with a fairly of a secure investment decisions. With preset Emissions standards, companies can plan and diversify their investments into more energy efficient technologies that results into emission of emit less carbon. A key benefit of market mechanism is that it gives incentives for innovative continuous emissions reduction. In cases of inflation, market mechanisms are advantageous because they allow automatic adjustments to new prices and as such no legislative action is needed. An externality refers to a cost or a benefit of activities