How to Use Cap & Trade to Address Negative Externalities
Cap and trade is a system designed to put a market value on the carbon companies emit into the environment. Rather than stipulate the amount of carbon dioxide that a company can release, the system allows companies to buy carbon credits from cleaner companies who sell their unused carbon credits. This process is designed to decrease the amount of carbon dioxide released into the atmosphere.
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Instructions
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Set a price for a unit of carbon dioxide or other pollutant emitted into the atmosphere. Use a price that is comparable to current efforts to clean up the environment. This will have the effect of placing a true benchmark on the price. For example, if the U.S. government spends $1 billion a year on efforts to reduce carbon emissions and clean the atmosphere, then that amount could be spread across polluting companies nationwide.This price must be enacted into law by a government to have reasonable force to compel firms to comply.
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Assign a cost to each company based on the level of pollution they create for a particular contaminant. For example, if a company spews 100 tons of carbon into the atmosphere each year, and the price of a ton of carbon is $1,000, then the company would have a $100,000 pollution burden.
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Create a publicly listed or over-the-counter exchange for companies to trade their pollution credits. Companies with the ability to reduce their emissions will make more profit, while those that increase pollution will have greater costs.
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Reduce the number of pollution credits available to each company each year. The decrease in supply will increase the cost of each credit based on market forces and give companies an incentive to reduce their emissions.
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References
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