1887

Two approaches to pricing pollution

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In comparison is the commonly used Cap and Trade method with an alternative and novel method for pricing pollution: The aim was to conduct a practical approach to clarify advantages and challenges of the respective mechanisms. Shortly, the report promotes:1) Levying a Fee which is sufficiently high and adjusted sufficiently often for a Fee 2) Letting the Futures Market and other hedging and insurance instruments indicate the price (the average abatement cost) which can be levied without harming the economy. 3) Securing a repayment of a sufficiently large fraction of the revenue from the Fee. These three parts or components are all essential to the mechanism. Still, key questions remain unanswered in this report. This project was launched by the Working Group for SCP (HKP) in collaboration with the Working Group on Environment and Economy (MEG) under the Nordic Council of Ministers.

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Appendix

Public choice theory and historical evidence show that some governmental institutions can cause large damage on the economy if abused by governments. In addition, theoretical and empirical research show that governments indeed might have strong incentives to abuse these institutions. Whereas there is a trend to make some of these institutions independent of the government it is also argued that independence creates new problems regarding the accountability, responsibility, and legitimacy.

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