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.



Economic instruments for pricing pollution

The purpose of this analysis is to evaluate approaches to setting a price on pollution. Environmental legislation is introduced to protect the environment, create incentives to develop new technologies, create national strongholds and implement the polluter pays principle (PPP). The price on pollution expresses the cost and benefits that are connected with the change of behaviour or action according to the objective and belonging target of the environmental policy. This includes the valuation of the externalities. These externalities are seldom traded on a market and need to be assessed by using valuation methods which are likely to be uncertain. The second-best alternative is to estimate or reveal the avoidance cost or, in other words, the abatement cost of reducing emissions. This can be done through gathering information directly from companies or be revealed as a willingness to pay at the market place. The most pragmatic way to estimate or determine the price on the pollution is through the creation of a market. Two different approaches to creation of markets will be investigated in the following.


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