How are cap-and-trade schemes designed to reduce emissions?
What will be an ideal response?
A cap-and-trade scheme is a market-based approach to setting the quantity of pollution to the socially optimal level. Polluting firms are given a number of "permits" for pollution, usually based on their historical levels of pollution. Firms that find it relatively cheaper to reduce pollution would do so and sell their extra permits to firms that find it expensive to reduce pollution. Becausethe number of permits is fixed, total emissions cannot exceed a certain level. Under cap-and-trade schemes, the marginal cost of pollution abatement is equalized across firms.
A-head: ECONOMICS OF THE ENVIRONMENT
Concept: Cap-and-trade schemes
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