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Two approaches to pricing pollution

image of Two approaches to pricing pollution

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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Results

The report compares flexible emission fees and tradable emission permits based on a set of criteria. The latter is used analytically to highlight differences between the proposed flexible emission fee mechanism and a well described and broadly applied mechanism. However, tradable emission permits faces challenges as expressed in the current debate on the future of the European Emission Trading System. The pros and cons of flexible emission fees are in focus, and efforts have been made to point out the particular advantages and disadvantages in comparison with tradable emission permits.

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