Cap and trade system pros and cons

Cap and trade: pros and cons. February 15th Issue. Cap and trade: pros and cons February 15, About the Author: Geraldine Warner. Geraldine Warner was the editor of Good Fruit Grower from During her tenure, she planned and prepared editorial content, wrote for the magazine, and managed the editorial team.

Read her stories: Story Index. This paper assesses alternative emissions trading schemes at domestic level: 1 schemes where the total level of emissions is fixed absolute cap-and-trade , 2 schemes where the allowable level of emissions per firm is related to some firm-specific indicator relative cap-and-trade , and 3 mixed schemes which combine elements of the above alternatives.

We present a quantitative assessment of these alternatives for climate change policy in the Netherlands.

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It is concluded that while relative cap-and-trade would avoid negative effects on competitiveness, it would not reduce emissions at the lowest costs. Besides, the addition of a trade system to existing relative standards does not result in additional emission reduction; it should be combined with other policy measures, such as energy taxes, in order to realise further reduction.

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Absolute cap-and-trade leads to efficient emissions reduction, but, implemented at the national level, its overall macroeconomic costs may be significant. The mixed scheme has as drawback that it treats firm's unequal, which leads to high administrative costs. We conclude that none of the trading schemes is an advisable instrument for domestic climate policy.

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United Kingdom. Descriptors DEI. Descriptors DEC. Publication Year Publication Year. Language Language. Reference Number Reference Number.

Choose fields to export. Many other countries are also adopting a similar policy, including China , which will be launching its own ETS system in February this year. Around a thousand UK-based businesses are affected. In addition, the UK ETS will continue to use auctions as a means of introducing allowances into the market. However, certain sectors such as operators of installations and aircraft operators will be eligible for free allocation of allowances.

In addition, the fines that are imposed for emissions that exceed allowances will be increased from EUR per tonne to GBP per tonne. Avoiding carbon leakage In any discussion of climate policy, it is important to take a global perspective. Especially now that the UK has more ambitious targets than the EU, it is likely that the market price of carbon emissions will be higher in the UK than the EU. This increases the risk of carbon leakage , which is when businesses relocate their operations to countries with laxer emission constraints and a lower carbon price.

This has the potential to defeat the whole purpose of the ETS which is to reduce global emissions to fight climate change. At present, carbon leakage is partly mitigated by the free allocation of allowances and compensation to businesses. These allowances can also potentially be used as part of industrial policy, to incentivize certain industries.

A carbon border adjustment mechanism works by imposing a tax on imported goods based on their carbon content. By having similar policies like these in place, coupled with making the UK an attractive place to invest and do business, the UK can effectively mitigate the effects of carbon leakage.

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It can then take the lead in setting its own tougher environmental policies, and be the example for others to follow. Image credit: Photo by Paul Fiedler on Unsplash. Sign in. Log into your account. Forgot your password?

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