Cap and Trade Policy: In the Past

Cap and Trade Policy:

In the past few years, there has been solid scientific evidence that global warming or climate change is taking place. This has contributed to the birth of carbon emissions trading within the European region and the enactment of several mitigation initiatives at the state level. These measures have in turn exerted pressure on the federal government to control the emission of carbon dioxide, which has reached fever pitch. Actually, the Bush Administration declared that America will work with other countries to develop a new model for the emissions of greenhouse gases though focusing on adaptation and energy-efficient technologies. In addition, the U.S. Congress is considering adopting the cap and trade policy within the economy because of the success of sulfur-trading initiatives that were enforced on the power sector. This consideration is fueled by the fact that the Congress has received several recommendations to adopt such systems. Notably, the success and effectiveness of the cap and trade system is dependent on the model of marginal costs and benefits.

Marginal Costs of Cap and Trade Policy:

While global warming has continued to be a major problem, the realization if transparency regarding the costs and benefits of restricting greenhouse gas emissions is increasingly difficult because of the completely huge differences in estimates of the effect of emissions control. As part of examining the marginal costs of cap and trade policy within the economy, it's important to understand how the program works.

Generally, a cap and trade system may require a decision to cap greenhouse gas emissions made at a particular level. During this process, allowances are built to permit companies to emit specific amounts of greenhouse gases ("Costs, Benefits, and a Roadmap," 2010). Therefore, without the allowance, a company is prohibited from emitting greenhouse gases. On the contrary, companies that emit less greenhouse gases than their allowances can sell these allowances to other firms. In this case, the total quantity of allowances created at the specific level equals the overall cap on emissions.

As required by the cap and trade policy within the economy, American firms must have a license for every ton of greenhouse gases they emit. Since these licenses or permits are tradable, companies can buy from and sell them to others. The Congress is considering adopting a cap and trade policy since it will help the federal control to control the total quantity of greenhouse gases emitted. The limits on the overall quantity of greenhouse gases emitted can also be achieved through limit the number of these permits.

The marginal costs of cap and trade policy within the economy arises from two basic sources. First, the cost of this system emanates from the requirement for companies to buy the allowances for greenhouse gas emissions. Secondly, these costs are attributed to the need for firms to adopt new technologies to confine greenhouse gases emissions or sources of energy that emit less because of the restrictions on the overall level of emissions.

Generally, the marginal costs of a cap and trade policy within the economy is the price companies have to pay for the allowances or for emissions of greenhouse gases. This contributes to an overall economic cost where the price of limiting the emissions is established against the environmental benefits, which contributes to a distributional effect. Moreover, the emissions permit through this policy implies that the allowances command a market price while their value goes to someone (Krugman, 2009). A growing fraction of this value would be obtained by the government through auctions that are used to lessen or prevent increases in other taxes that are recycled to consumers. The rest of the costs would be passed on to industry though the biggest portion would go to customers because the major recipients would be regulated utilities.

The main principle behind the cap and trade policy within the economy is to monetize the social costs of greenhouse gases emissions and add them to the company's market costs. Social costs of these emissions are not only borne by the producer or market only; they are also borne by the world's inhabitants. However, companies will only perform productive activities to the extent that marginal costs do not outweigh benefits. In their calculations, companies do not consider the wider costs enforced by the emitted greenhouse gases while carrying out these productive activities.

Benefits of Cap and Trade Policy:

As previously mentioned, the effectiveness of a cap and trade policy is dependent on the costs and benefits. A cap and trade policy is more efficient than a price mechanism if there is significant uncertainty regarding marginal abatement costs or if marginal costs are relatively flat while the benefits of abatement decreases at the seemingly rapid state. The effectiveness of this policy in such scenarios is because it's a quantity rather than price instrument. This implies that a cap and trade policy within the economy will work effectively when the costs of transactions are low (Stavins, 2012).

There are several benefits of a cap and trade policy within the economy including the fact that such systems promote accountability. Since firms do not consider the broader effects of greenhouse gases emitted during their production activities, it's important to adopt measures and policies that would promote accountability. A cap and trade policy helps to achieve this goal because without cap and trade programs, companies will not adequately account for the costs and effects of greenhouse gases they emit. Through increasing the total costs of greenhouse gases emissions, cap and trade policy will promote accountability by forcing many firms to search for less-pollutant means of production.

Secondly, a cap and trade policy lessens the social costs associated with the increased emission of greenhouse gases. Generally, the emissions of these gases not only affect the producer and market but they also have significant effects on the world's inhabitants. Therefore, the social costs of global warming are huge including making millions of people to suffer hunger, shortage of clean water, and coastal flooding ("Costs, Benefits, and a Roadmap," 2010).

The third benefit of cap and trade policy within the economy is that it helps in controlling the emission of greenhouse gases. Actually, one of the main reasons for the consideration of this policy by the U.S. Congress is that it will enable the federal government to control the total quantity of greenhouse gases emitted by companies. The ability of the policy to lessen social costs is directly linked to the control of greenhouse gases emissions.