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Free Market Strategies to Confront Global Warming


The debate is over

Challenges to the Economic Approach:

The Case for Market Intervention

Free Market Strategies
-What is being regulated?

Carbon Taxes

Emissions trading: Cap and Trade

Economic Adaptation

Further Information

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Free Market Strategies

    Carbon taxes and emissions trading are two major strategies that have been put forth to reduce CO2 emissions in a progressive way.  Both serve to internalize the negative externalities of global warming, though they regulate in different ways and involve varying levels of administrative control.  The fundamental difference is this: Carbon taxes set a price for CO2 and let the market determine the quantity and emissions trading sets the quantity for CO2 and lets the market determine a price.  The implications of this difference will come later in this section.  Luckily, there are a number of examples where these strategies have been used in environmental issues, such as leaded gasoline, sulfur emissions in coal and the current carbon trading under Kyoto to regulate carbon.  Both of these strategies have infinite variations and attributes, so the purpose of the following sections will be to cover the basic challenges and the main arguments for or against.

What is being regulated?
    Before a discussion of the methods to regulate carbon dioxide emissions can take place, a defined idea of what is actually being regulated should be discussed.  Since the carbon emissions we are discussing is not a product, but contained in many products, there are several methods to go about regulation.  The fuel itself can be regulated via its carbon intensity.  This would mean that the price of a fuel (tax or permit equivalent) would be altered from the beginning.  This method was used with lead fuel regulation and has the advantages of much lower monitoring and enforcement costs.  Since only the fuels would need to be monitored the process would be fairly simple.  In the case of carbon emissions, there are a number of fuels with carbon contents and others with different greenhouse gas emissions that would need to be regulated.  The alternative option would be to regulate at the emissions side as was done with SO2 emissions.  This made sense because it meant that power companies could install scrubbers and other technologies to remove SO2 and reduce their cost.  They could also decide to purchase low sulfur coal, but the options were open to them as to how they would do it.  The flexibility is great for the producers, but the regulatory costs are much greater, as it comes down to verifying every plant.  Considering the scale of any level of carbon regulation, the preference for the lowest regulation cost is more important than in other cases.

Last updated:  2/2/2006


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