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.



Description of the project – methodology

This report will further the discussion of flexible emission fees by means of a comparison with tradable emission permits. Focus will be on the practical applicability of the mechanism discussed upon theoretical criteria. The analysis explores the usefulness of flexible emission fees as an economic policy instrument for pricing pollution, and it can be seen as a step towards testing and maturing the idea of flexible emission fees. The flexible emission fee can be used as a policy instrument in line with other market-based instruments. The analysis will explore the similarities and differences compared with other instruments, especially cap and trade. The overall aim of the flexible emission fee is to set the correct price on pollution, thereby achieving a fair payment from the users of the environment. A Nordic perspective is maintained in the establishment of cases. The analysis does not carry out any formal analysis, modelling nor consider legal aspects. It is outside of the scope of the analysis to examine legal obstacles and related considerations. The analysis will be based on the interviews conducted during the project phases and the theoretical considerations already made in previous analyses.


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