Market-Based Instruments: Emission Reduction Strategies

This lecture discusses the role of market-based instruments in achieving optimal emission reductions. The instructor explains how these instruments allow emitters to choose their abatement strategies while ensuring that the overall reduction in emissions is achieved at the lowest cost. The lecture covers the concept of marginal abatement costs and the importance of equalizing these costs across different sources of emissions. The instructor illustrates how a uniform price on emissions can lead to efficient allocation of abatement efforts, emphasizing that emitters will adjust their strategies based on the price signal. Additionally, the lecture addresses potential discrepancies in cost perceptions between emitters and social planners, highlighting issues such as the landlord-tenant paradox and the importance of considering co-benefits. The instructor concludes by discussing the necessity of complementary measures alongside market instruments to ensure effective emission reductions, particularly in real-world scenarios where subjective and objective costs may differ.