Tradable Emissions Allowances: Market-Based Solutions for Emission Reduction

This lecture discusses the impact of tradable emissions allowances on reducing carbon emissions. It begins with an explanation of how emitters are allocated allowances and the implications for those who do not receive enough permits. The instructor illustrates the dynamics of emissions trading, highlighting how emitters with lower abatement costs can sell their permits to those with higher costs, thus achieving overall emission reductions at minimal costs. The lecture emphasizes the necessity of gradually increasing the price of emissions to incentivize further reductions over time. The instructor uses examples, such as a carbon tax on gasoline, to demonstrate how incremental price increases can lead to significant behavioral changes among emitters. Additionally, the lecture addresses the importance of technological advancements in reducing mitigation costs and how these developments can shift the marginal abatement cost curve. The discussion concludes with a summary of the advantages of market-based instruments, emphasizing their flexibility and efficiency in achieving emission reduction targets while ensuring that the lowest-cost measures are implemented.