New permits to pollute may help reduce CO2 emissions and tackle climate change

January 6th, 2009 - 5:25 pm ICT by ANI  

Washington, Jan 6 (ANI): Leading economists have found a new way to reduce carbon dioxide (CO2) emissions and tackle climate change, in the form of permits to pollute.

Under the proposals, companies would buy what are in effect permits to pollute, but the price of those permits would be controlled because the government would retain enough, at a fixed price, to stop the cost increasing above that level.

According to the economists, it could appeal to supporters of a carbon tax and also to those who favour the alternative, so-called cap-and-trade.

Until now, there have been two options for reducing emissions carbon tax and cap-and-trade.

A carbon tax is a tax on the carbon content of fossil fuels. The result is that the more CO2 a company emits, the greater the cost, with most or all of the money raised from the tax possibly redistributed to the public, because the aim is to discourage emissions rather than raise revenue.

The problem with this approach is that it leaves uncertain the quantity of emissions reduction that will be achieved.

In the second approach, cap-and-trade, the government would set a limit for the annual emissions, and companies would buy permits or allowances for set amounts.

Again, the money raised would be redistributed.

While that would directly tackle the amounts of gas produced, the downside is that there is no control on the price of the permits and hence the cost of emissions reductions, resulting in significant cost uncertainty.

The neat solution proposed in one the research papers is a hybrid cap-and-trade, where allowances are issued and bought, but a ceiling price enforced by the Government holding back a proportion of them.

They would have a predetermined set price that would ensure that the market price of those already issued would never rise about that price.

The government would hold allowances for the purpose of selling them at a predetermined price, said Professor Robert N. Stavins, Albert Pratt Professor of Business and Government, at the John F. Kennedy School of Government, Harvard University.

As a result, they will keep the price of allowances in the market from ever going above that that level, thereby eliminating the upside cost uncertainty that has been of great concern to private industry, he added. (ANI)

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